S. Korea’s banks remove 12-month deposits exceeding 3.5%

South Korean banks have eliminated all 12-month term deposits offering interest rates above the central bank's benchmark of 3.5%, while simultaneously raising loan interest rates, fueling criticism that banks are profiting from widening interest margins as expectations of a rate cut grow. /Graphic by Baek Hyung-sun

In a surprising shift, South Korean banks have eliminated all 12-month term deposits with interest rates exceeding the Bank of Korea’s benchmark rate of 3.5%.

This is attributed to the significant drop in bank bond rates, which are a key factor in banks’ funding costs, fueled by growing expectations of a rate cut in the latter half of the year.

While banks are lowering deposit rates, they are simultaneously increasing loan interest rates, citing the need to control and reduce the growing levels of household debt. This widening gap between the interest rates banks offer on loans and what they pay on deposits—known as the net interest margin—is drawing criticism that banks are once again profiting excessively from interest rate differentials.

As of Aug. 19, according to the Korea Federation of Banks, the highest interest rate among 38 different 12-month term deposit products is 3.42%, offered by Suhyup Bank’s ‘Hey regular deposit’.

However, even this rate is below the current Bank of Korea benchmark rate of 3.5%. Following this, Nonghyup Bank’s ‘NH All-One e-Deposit’ offers a rate of 3.4%, and Woori Bank’s ‘WON Plus Deposit’ offers 3.37%.

Of these, 24 products have interest rates between 3.0% and 3.5%, while 11 products offer rates between 2.5% and 3.0%. Only 3 products have interest rates below 2.5%. Which means that no term deposits in S. Korean Banks are offering rates higher than the Bank of Korea’s benchmark rate.

This information is based on data from the previous month’s disclosures by the Korea Federation of Banks.

Up until June, there were still some 12-month term deposits with average interest rates above 3.5%, but these have completely disappeared over the past month. For instance, Suhyup Bank’s ‘Hey Regular Deposit’ had an average interest rate of 3.65% in June, but it dropped by 0.23 percentage points last month.

The primary reason for the decline in term deposit rates is the sharp drop in bank bond rates. Expectations of an imminent rate cut by the S. Korean central bank have already been factored into bond yields, reducing the funding costs for banks.

According to the Korea Financial Investment Association, the interest rate on 12-month bank bonds, which is a benchmark for setting deposit rates, fell from 3.65% on May 17 to 3.28% on Aug. 16—a decrease of 0.37 percentage points over three months.

While deposit rates are falling, banks have been raising loan interest rates in recent weeks. This is because financial authorities are pushing banks to control household debt, so banks are raising loan interest rates by adding extra charges and offering fewer discounts to discourage people from borrowing. In fact, the five major banks—KB Kookmin, Shinhan, Hana, Woori, and Nonghyup—have collectively raised mortgage loan rates 17 times from last month until Aug. 20.

As of Aug. 16, the mixed mortgage loans (fixed for 5 years, then variable) from these banks ranged from 3.07% to 5.97%. Compared to a month ago, when the range was 2.89% to 5.64%, both the lower and upper bounds have increased by 0.18 and 0.33 percentage points, respectively.

Following this trend, S. Korean major banks are expected to continue raising loan interest rates.

For example, KB Kookmin Bank will increase mortgage loan rates by 0.3 percentage points and jeonse (rental deposit) loan rates by 0.2 percentage points starting Aug. 20.

Shinhan Bank plans to raise rates by 0.05 percentage points on loan products tied to financial bonds with maturities of three years or less, starting Aug. 21.

Hana Bank plans to effectively increase loan interest rates by reducing loan discounts.

Hana plans to reduce interest rate discounts on its ‘Hana One-Q Mortgage Loan’ by 0.6 percentage points and on its ‘Hana One-Q Jeonse Loan’ by 0.2 percentage points from Aug. 22. Reducing these discounts effectively increases the actual interest rates on these loans.