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By Lee Yeon-woo
Despite a recent rate cut by the Bank of Korea (BOK), loan rates at major banks continue to rise due to regulatory pressure to tighten household lending. As these banks reduce deposit rates in response to the key rate decrease, the loan-deposit margin is expected to enhance their interest income this year.
According to the Korea Federation of Banks (KFB), Sunday, the average mortgage rate among five major banks in Korea —KB, Shinhan, Hana, Woori, and NH — rose to 3.946 percent in October, an increase of 0.342 percentage point from the previous month. At KB, Hana, and NH, the average mortgage rates have now surpassed 4 percent.
Personal loans were no exception to the hike. The average interest rate on personal loans at these banks, excluding products for low-income customers, also increased by 0.11 percentage point, rising from 4.8 percent to 4.91 percent over the month. At Shinhan and NH, the average rate has now crossed the 5 percent threshold.
This contrasts with earlier expectations that the central bank's rate cut would ease the public's debt burden and help revive stagnant domestic demand.
The gap is due to financial authorities' request for banks to manage household debts. Since this year, the government has implemented several measures to curb skyrocketing household debt. One measure involved urging local banks to voluntarily tighten their screening of household loans. Under such pressure, banks have been raising lending rates by increasing the spread since July.
What's also noticeable is that major banks are lowering deposits rates in response to the rate cut. This widening loan-deposit margin is likely to support bank profitability for the foreseeable future, as long as this policy trend continues.
Data from the KFB showed that the highest interest rates among the top five banks ranged from 3.35 percent to 3.55 percent per year. Over the past three weeks, compared to the day after the BOK's rate cut, the lower end of the range has dropped by 0.2 percentage point, while the upper end has fallen by 0.25 point.
NH NongHyup Bank was the first among the top five to substantially lower deposit rates, reducing rates on lump-sum deposit accounts by 0.25 to 0.4 percentage point, and on installment savings accounts by 0.25 to 0.55 percentage point, respectively.
Woori Bank also cut rates on savings products by 0.2 percentage point on both Oct. 23 and Friday, while Hana Bank followed suit by lowering base rates on 11 deposit products by 0.05 to 0.25 percentage point. Standard Chartered Bank Korea and Toss Bank also adjusted their deposit and savings rates by up to 0.8 and 0.3 percentage point, respectively, from Friday.
Banks that have yet to lower their deposit rates are also considering rate adjustments, according to industry sources. If banks don't lower deposit rates when the key interest rate decreases, they end up securing funds at above-market rates, which can affect their profitability.
However, government and industry officials believe that this trend will be temporary.
"Due to banks' concerns over managing household debt, the impact of the key interest rate cut has not been fully reflected in new loan rates," Kim Byoung-hwan, chief of the Financial Services Commission, told reporters on Wednesday. "If the BOK continues to lower the key rate, this is likely to gradually influence new loan rates over time."
At a press meeting after the October monetary policy committee meeting, BOK Governor Rhee Chang-yong also remarked that he does not view the rate hike on household loans as a "misaligned measure." He emphasized that he believes the measure can help restructure Korea's financial markets, which are heavily skewed toward household debt and real estate.
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