Interest burden could ease in Korea, with bank bond rates touching yearly low

[Photo by Yonhap]

Bank bond rates in South Korea, which are used by commercial lenders to calculate lending rates, are on a decline, falling by more than 1 percentage point in two months to hit an yearly low.

Focus is on whether the trend will lead to lower rates on mortgages and credit loans, which account for a large portion of household loans.

According to the Korea Financial Investment Association on Monday, the 5-year (AAA-rated) bank bond rate, which serves as the basis for calculating the fixed mortgage rate, was 3.793 percent on December 22.

The figure is a significant drop of more than 1 percentage point in just two months, following the peak on October 26 at 4.81 percent.

The interest rates for 6-month and 1-year bank bonds also declined, reaching 3.864 percent and 3.756 percent on December 22, respectively, after hitting a yearly high of 4.108 percent on November 13 and 4.153 percent in late October.

“Expectations for a U.S. interest rate cut in 2024 seem to be reflected in the 5-year bank bond rate,” said an official from a local commercial bank.

The 5-year bank bond rate had been on a continuous upward trend after rising to the 4 percent range at the end of May, but it started declining from December 14, reaching under 4 percent.

On December 14, in particular, the rate dropped by 0.235 percentage point overnight, marking the biggest decline of the year.

Normally, KB Kookmin Bank’s and Woori Bank’s variable interest rates for home mortgage loans are linked to the Cost of Funds Index (Cofix), the benchmark for short-term financing cost, while Shinhan Bank and Hana Bank tend to follow bank bond rates.

On the other hand, the fixed interest rates for mortgages and credit loans are linked to bank bond rates. Accordingly, if the bank bond rate goes down, the household loan rate is likely to go down as well.

However, statistics through October show that the interest burden on households and businesses remains high, with new delinquencies reaching the highest level in five and a half years due to the high-interest rate environment.

According to data released by the Financial Supervisory Service (FSS) on Monday, the amount of new delinquencies in October was 2.4 trillion won ($1.85 billion), up 200 billion won from the previous month. This is the highest level since April 2018 when 3.5 trillion won of new delinquencies occurred due to the initiation of the rehabilitation process for HSG Sungdong Shipbuilding Co.

The FSS attributed the increase in new delinquencies in October to the fact that more households and businesses were unable to repay their debts due to high interest rates and a slowing economy.

In 2023, Korean banks generated an average of 2.02 trillion won in new delinquencies per month, the highest level since 2017.

The monthly average of new delinquencies at local banks was less than 1 trillion won in 2021, and remained at only 1.05 trillion won in 2022. From May 2018 to April 2023, there were no new delinquencies of more than 2 trillion won per month, but since May 2023, new delinquencies exceeding 2 trillion won have been occurring every month.

“This is due to a sharp increase in the number of households and businesses experiencing delinquency due to the burden of higher financing costs as the impact of rising interest rates has intensified this year,” said an unnamed financial authority official.

As new delinquencies rose, so did the delinquency rate of local currency loans at Korean banks.

The won-denominated loan delinquency rate at local banks recorded 0.43 percent at the end of October, up 0.04 percentage points from the previous month. This is the same level as in August 2023, when it hit a three-year high. The October delinquency rate was up 0.19 percentage points from the same period a year ago.

By loan type, the delinquency rate was 0.37 percent for household loans, up 0.15 percentage point from 0.22 percent in October 2022, and 0.48 percent for corporate loans, up 0.22 percentage point.

In household loans, the delinquency rate for credit loans was the highest at 0.71 percent, while in corporate loans, the delinquency rate for small and medium-sized corporations was the highest at 0.59 percent. The delinquency rate for large corporations was 0.19 percent, more than double the rate of 0.07 percent in October 2022.

The FSS plans to prepare for a potential weakening of bank soundness by actively increasing banks’ loss absorbing capacity.