Shares of Korean banks were trading sharply lower on Wednesday on concerns that the anti-trust watchdog's probe into alleged interest rate collusion will likely hurt their profitability.

The Fair Trade Commission (FTC) said Tuesday that it had launched a probe into brokerage companies on suspicions that they colluded to fix rates on 91-day certificates of deposit (CDs). The regulator also kicked off a probe into four major local banks over their suspected involvement on Wednesday.

CDs, which local banks sell for funding, are widely used as the benchmark for banks' lending rates.

On concerns that its probe will hurt banks' profitability, shares of South Korea's financial services companies were trading lower, analysts say.

Shares of top banking group Woori Finance Holdings were trading at 11,050 won ($9.67) on the main bourse, down 2.64 percent from the previous session as of 11:29 a.m. No. 2 player KB Financial Group fell 2.22 percent to 35,300 won and Shinhan Financial Group lost 1.86 percent to 36,900 won.

"It is hard to predict the results of the probe. But the move will work as a setback for banks, so there is a high chance that their net interest margins will fall," said Lee Chang-wook, an analyst at Taurus Investment & Securities Co.

Currently, the CD rates are announced twice a day based on quotations by local 10 securities firms with the volume of CDs sold by seven banks.

The probe came as the CD rates remained relatively high even as other market rates have fallen, raising suspicions about the rate-fixing.

The rates on three-month CDs have remained glued at 3.54 percent for almost three months since March although yields of government bonds have been on the downward trend.

Higher CD rates help boost local banks' profitability by raising interest income as a bulk of household loans are tied to the rates.

Household lending handled by local banks and non-bank institutions totaled a record 642.7 trillion won at the end of May.

Some market watchers have raised doubts about the timing of the probe, saying that the government may have the intention to allow the CD rates to fall, aiming to lower households' debt-paying burdens.

The FTC's probe came as similar investigations are underway in the United States and Britain into banks, including Barclays, for their alleged involvement in rigging the London Interbank Offered Rate or Libor, a benchmark interest rate in the global financial market. (Yonhap)