As major banks raise deposit rates in response to high interest rates, savings banks are hesitant to engage in deposit competition. With restrictions on household loan regulations and delinquency management limiting their funding options, raising deposit rates could significantly increase interest costs. This dilemma for savings banks, aimed at maintaining profitability, is now extending from lending to deposit operations.
According to the Korea Savings Bank Association, the average interest rate for one-year time deposits at 79 savings banks is currently 3.82%, down 0.04 percentage points from 3.86% in early July.
The high-interest products that were once a strength for savings banks are also dwindling. The number of time deposit products offering preferential rates of 4% or more has decreased from 113 at the end of July to 67 this month.
In contrast, the average interest rate for one-year time deposits at the five major commercial banks is 3.61%, narrowing the gap with savings banks to just 0.21 percentage points. Although the comparison involves different sets of products, the trend indicates that rising rates among commercial banks are diminishing the relative appeal of savings banks.
The cautious approach of savings banks toward raising deposit rates is influenced by constraints on loan operations. Savings banks typically use funds secured through deposits for loans and other investments, generating profits to cover funding costs. While they can also invest in securities, if the returns do not significantly exceed deposit interest costs, profitability will inevitably decline.
The challenge is that expanding loans to secure profitability is not straightforward. Ongoing issues with real estate project financing (PF) and regulatory management of household loan volumes complicate matters. According to the Bank of Korea, the balance of deposits at savings banks increased by 6.1869 trillion won from 98.1749 trillion won at the end of January to 104.3618 trillion won at the end of August. In contrast, the balance of loans rose only by 2.6099 trillion won, from 94.2086 trillion won to 96.8185 trillion won during the same period.
High delinquency rates also hinder aggressive lending efforts. As of the end of June, the delinquency rate in the savings bank sector was 6.26%, up from 6.04% at the end of the previous year. Increasing loans without adequately considering borrowers' repayment abilities can lead to higher delinquency and loss costs, further straining profitability.
Raising loan rates to defend profitability also has its limits. When existing deposits mature and are reinvested at higher rates, interest costs increase, but it is challenging to raise loan rates at the same pace. If the increase in funding costs is not fully reflected in loan rates, the interest margin may shrink, leading to reduced interest income.
A financial industry official stated, "Even if the base rate remains unchanged, the burden of costs due to elevated interest levels persists. Maintaining necessary liquidity while managing funding and loss costs stably will be a key challenge for the sector moving forward."
* This article has been translated by AI.
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