Korean savings banks offer lower deposit rates on weak loan operations

A savings bank in Seoul [Photo by Han Joo-hyung]

The deposit rates at South Korean savings banks have become lower than those at top commercial lenders as they struggle with loan operations amid rising delinquency rates and cost pressure.

SBI Savings Bank offers an annual 3.8 percent rate for one-year deposit accounts, which is lower than the rates offered by some commercial banks.

Among the top five savings banks, Welcome Savings Bank offers term deposit products with 4 percent annual interest and Pepper Savings Bank 3.5 percent interest.

According to the Korea Federation of Banks, Standard Chartered Bank Korea offers a maximum annual rate of 4.2 percent on its one-year term deposit.

Suhyup Bank and BNK Busan Bank have set annual rates at maximum 4.02 percent and 4.0 percent, respectively. NH Bank offers an annual 3.9 percent for its one-year term deposit account.

As the rates offered by savings banks become less competitive, they have seen a significant decline in the overall deposit amount.

The combined balance of deposits at savings banks stood at 115 trillion won ($90.9 billion) as of July 10, down from more than 120 trillion won in January.

Won-denominated deposits at local depository banks, on the other hand, increased by about 21 trillion won to 1,926 trillion won in May from 1,905 trillion won in January.

Concerns, in the meantime, rise that savings banks may face increased volatility.

The interest rates on short-term savings accounts at some savings banks are high, comparable to the interest rates on time deposits.

Daol Savings Bank offers up to 4 percent annual interest rate for its short-term savings account of up to 10 million won. NH Savings Bank offers up to 3.8 percent for up to 100 million won, and SBI Savings Bank 3.5 percent for up to 100 million won.

These are highly competitive interest rates compared to the 2 percent annual range for similar products offered by other banks.

Industry insiders note that the savings banks control the size of receipt through short-term savings products rather than regular deposits.

The interest rates for short-term, high-yield savings products are set on the final balance at midnight every day. Since customers can deposit and withdraw money at any time, even a small increase in the interest rate compared to competitors can bring in tens of billions of won a day, but it is also easy to lose money in an instant.

There is also a risk of further outflows of savings bank deposits later this year due to the retirement pension default option, which has been fully implemented since last week.

The retirement pension deposit balance at savings banks stood at about 29 trillion won as of the first quarter, accounting for one-third of the total deposits at those banks.

The default option is a system that allows pension funds to be managed according to a predetermined product if the pension plan member does not give direct instructions. Savings bank products, however, are excluded from the default option, meaning that if a member does not select a savings bank product in advance, they will be left out.

In the fourth quarter of last year, savings banks offered a 6 percent annual interest for their retirement pension deposit products as they were competing to sell deposits with offers of a 6 percent annual interest.

However, the products sold at the time will mature at the end of this year and savings banks may lose those deposits if members of those products do not designate the savings banks for their pensions in advance.

The Financial Supervisory Service is monitoring the changes in savings bank deposits following the implementation of the default option.

“So far, the impact of the default option on savings banks has been limited, but it is important to pay attention to the situation at the end of the year when retirement plan maturities are concentrated,” said an official from the authority. “There is a possibility that savings banks will experience higher-than-normal outflows at the end of this year, as they offered high-interest rates on retirement plan products at the end of last year.”