Korean savings banks suffer three-month decline in customer deposits

[Photo by Yonhap]

South Korean savings banks have seen a decline in both their lending and deposit business for the past three months, the first such occurrence since 2014, as customers are seeking higher returns on their investment.

According to market data on Wednesday, the total balance of deposits across 79 savings banks in the country fell by nearly 6 trillion won ($4.53 billion) to 114.6 trillion won at the end of April from 120.23 trillion won at the end of last year. The main reason is that interest rates for fixed deposits have fallen and customers are leaving in search of higher returns.

The 1-year fixed deposit interest rate for savings banks, weighted average based on new deposits, was 3.62 percent per year as of March. This is more than a 2-percentage point drop from 5.7 percent in December last year.

At end-March, the 1-year fixed deposit interest rate at commercial banks was 3.52 percent per year, only 0.1 percentage points lower than savings banks. This is unusual, as savings banks usually offer deposit rates that are 0.5 percentage points higher than those of commercial banks.

In the fourth quarter of last year, there was intense competition between commercial banks and savings banks to attract new customer deposits, resulting in the highest average fixed deposit rate of 4.3 percent per year from commercial banks and 5.82 percent from savings banks in November.

The total lending balance of savings banks across the country fell to 112.15 trillion won at the end of last month from 115.03 trillion won at the end of last year.

Savings banks earn profits through interest rate margins, and as a result, they could not actively engage in lending business when borrowing costs surged. With the highest interest rate set at 20 percent per year under current rules, and a default rate of around 5 percent, savings banks had to pay more attention to maintaining their financial soundness.

At the end of March, the interest rate on general loans at savings banks, including corporate loans, was 12.38 percent per year, down 0.7 percentage points from the end of last year.

It is difficult for savings banks to lower lending rates as borrowers’ ability to repay is declining. In March, SBI Savings Bank, the largest player in the field, offered loans at 17.58 percent per year to borrowers with a credit score of 800.

The delinquency rate of corporate loans in the secondary borrowing market was 2.24 percent at the end of last year, the highest since 2.44 percent tallied in the end of March 2016. Some large savings banks have strategically reduced deposits to manage liquidity and profitability.