"Mortgage Rates Near 7%... Banks Raise Deposit Rates to Prevent Capital Outflow to Stock Market [1mm Finance Talk]"

Loan-to-Deposit Spread Narrows for Four Straight Months, but Borrowers Still Feel the Pinch
Average Spread at Major Banks Stands at 1.28% in December
Three Out of Five Banks See Spreads Widen; Burden Grows on Outstanding Balances
Lending Rates Li

The average loan-deposit interest rate spread (the difference between lending and deposit rates) at major commercial banks has narrowed for four consecutive months since September last year. While lending rates remained unchanged, banks raised new deposit rates to attract more funds. However, in contrast to the average, some banks saw their loan-deposit spread widen, and the spread based on outstanding balances also increased, meaning that financial consumers continued to feel a pronounced chill. Since the beginning of this year, lending rates have also been rising, leading to expectations that the loan-deposit spread could widen again.

Despite the new loan-deposit interest rate spread shrinking for four consecutive months, the perceived financial chill remains unchanged. ChatGPT generated image

According to the Korea Federation of Banks on January 29, the average loan-deposit interest rate spread for new transactions at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) stood at 1.28 percentage points in December last year. This was a decrease of 0.02 percentage points from the previous month. The household loan-deposit spread (excluding policy loans for low-income groups) also narrowed by 0.088 percentage points to an average of 1.262 percent over the same period, marking the fourth consecutive month of decline. The difference between banks reached up to 0.19 percentage points.

The narrowing of the loan-deposit spread appears to be the result of commercial banks raising new deposit rates to secure year-end funds and prevent capital outflows to the stock market, as well as some banks applying preferential lending rates. The average rate for one-year time deposits was 2.908 percent in December last year, up 0.108 percentage points from the previous month, while the average household lending rate remained unchanged at 4.166 percent during the same period.

Interest Burden on Borrowers Increases... Mortgage Rates Nearing 7 Percent

Ironically, even as the average loan-deposit spread has narrowed, the interest burden on borrowers is increasing. Among the five major commercial banks, three (Shinhan, Woori, and Kookmin) saw their new loan-deposit spreads widen in December compared to the previous month.

Shinhan Bank’s spread increased from 1.22 to 1.38 percentage points, Woori Bank’s from 1.18 to 1.22, and Kookmin Bank’s from 1.16 to 1.27 percentage points. While the average spread at the five major banks narrowed, the figures at several banks actually rose, creating what is known as the "average trap." Furthermore, the loan-deposit spread based on outstanding balances, as well as the household loan-deposit spread (excluding policy loans for low-income groups), both widened by up to 0.06 percentage points from the previous month, increasing the burden on existing borrowers.

Yonhap News

As of the 28th, the five major commercial banks’ five-year fixed-rate (mixed and periodic) mortgage rates ranged from 3.97 percent to 6.7 percent per annum. The upper limit has exceeded 6 percent for less than two months and is now approaching the 7 percent mark. Corporate lending rates also rose by 0.06 percentage points from the previous month to 4.16 percent per annum.

Expectations for Rate Cuts Fade, K-Shaped Polarization... Interest 'Chill' Intensifies in the First Half

There are forecasts that the interest burden on borrowers will increase in the first half of this year. This is because commercial banks are raising lending rates and expanding the loan-deposit spread, while the Bank of Korea’s rate cut cycle has ended and the government is maintaining its stance on loan regulations-factors that are likely to persist throughout the first half of the year.

A banking industry official commented, "Not only global economic trends and monetary policy, but also the entrenchment of 'K-shaped growth,' where gaps widen by industry and class, are slowing economic recovery and increasing the number of distressed borrowers." The official added, "From a risk management perspective, there is a strong possibility that banks will raise additional spreads, especially for small and medium-sized enterprise and household loans, making it difficult to reduce the loan-deposit spread."