By Chung Ah-young
The latest rate cut by the Bank of Korea (BOK) is expected to hit banks hard by bringing down their interest margins, analysts said Thursday.
An interest margin is the gap between lending and deposit rates, with narrower margins meaning reduced interest income for banks.
The central bank slashed its key policy rate by 0.25 percentage points to 2 percent, the second time in two months that it has done this, on Wednesday's monetary policy meeting.
Local lenders are expressing concerns over the additional rate cut which will worsen the net interest margins (NIM), a key barometer for measuring the profitability of banks.
Banks have been suffering from worsening profitability because lower interest rates resulted in steep falls in interest income.
NongHyup Bank will soon decide deposit and lending rates, while Hana Bank will adjust its rate later because it already cut its deposit interest rates on Oct. 2.
Other banks will likely change their floating lending rates starting from next month because the rates are set by the benchmark for floating lending rates Cost of Fund Index (COFIX).
COFIX is determined by averaging interest paid on capital funding by nine major lenders and is announced every month by the Korea Federation of Banks. The COFIX hit a record low of 2.27 percent in September.
"It will not be easy to reflect the central bank's key rate on our deposit and lending interest rates right away because interest rates are already hitting their lowest," said a bank official.
"We are very cautious at adjusting rates because lowering deposit rates will irk customers and lowering the lending rates will hurt our margins," he said.
However, banks will be under growing pressure to adjust their lending rates downward following the BOK's rate cut, which is aimed at boosting private consumption and corporate investments.
According to the BOK, banks' deposit interest rates were 2.36 percent in August, 0.13 percent down from the previous month, while the lending rate was down by 0.21 percentage points to 4.18 percent. Thus, the NIM posted 1.82 percent, up 0.02 percentage points during that period.
Choi Jung-wook, a researcher at Daishin Securities, said that the Central Bank's rate cut will hit the banks' earnings hard. "It is inevitable for banks to see a decline in their profit margins for every rate cut by the central bank. In general, a 0.25 percentage points rate cut leads to a 2-3 basis points fall in their annual margins," he said. "If the NIM is 1.9 percent, 1-1.5 basis points will decline from their margins," he said.
Kim Woo-jin, a senior researcher of the Korea Institute of Finance, said local lenders have lower profitability compared to the world's top 50 banks because of the low interest margins.
However, the low interest rates will likely boost customers to take out more home-backed loans, pushing up banks' profits. According to recent data from the BOK, a 0.25 percentage points rate cut will bring an 0.24 percent increase annually in household debt.
The latest rate cut by the Bank of Korea (BOK) is expected to hit banks hard by bringing down their interest margins, analysts said Thursday.
An interest margin is the gap between lending and deposit rates, with narrower margins meaning reduced interest income for banks.
The central bank slashed its key policy rate by 0.25 percentage points to 2 percent, the second time in two months that it has done this, on Wednesday's monetary policy meeting.
Local lenders are expressing concerns over the additional rate cut which will worsen the net interest margins (NIM), a key barometer for measuring the profitability of banks.
Banks have been suffering from worsening profitability because lower interest rates resulted in steep falls in interest income.
NongHyup Bank will soon decide deposit and lending rates, while Hana Bank will adjust its rate later because it already cut its deposit interest rates on Oct. 2.
Other banks will likely change their floating lending rates starting from next month because the rates are set by the benchmark for floating lending rates Cost of Fund Index (COFIX).
COFIX is determined by averaging interest paid on capital funding by nine major lenders and is announced every month by the Korea Federation of Banks. The COFIX hit a record low of 2.27 percent in September.
"It will not be easy to reflect the central bank's key rate on our deposit and lending interest rates right away because interest rates are already hitting their lowest," said a bank official.
"We are very cautious at adjusting rates because lowering deposit rates will irk customers and lowering the lending rates will hurt our margins," he said.
However, banks will be under growing pressure to adjust their lending rates downward following the BOK's rate cut, which is aimed at boosting private consumption and corporate investments.
According to the BOK, banks' deposit interest rates were 2.36 percent in August, 0.13 percent down from the previous month, while the lending rate was down by 0.21 percentage points to 4.18 percent. Thus, the NIM posted 1.82 percent, up 0.02 percentage points during that period.
Choi Jung-wook, a researcher at Daishin Securities, said that the Central Bank's rate cut will hit the banks' earnings hard. "It is inevitable for banks to see a decline in their profit margins for every rate cut by the central bank. In general, a 0.25 percentage points rate cut leads to a 2-3 basis points fall in their annual margins," he said. "If the NIM is 1.9 percent, 1-1.5 basis points will decline from their margins," he said.
Kim Woo-jin, a senior researcher of the Korea Institute of Finance, said local lenders have lower profitability compared to the world's top 50 banks because of the low interest margins.
However, the low interest rates will likely boost customers to take out more home-backed loans, pushing up banks' profits. According to recent data from the BOK, a 0.25 percentage points rate cut will bring an 0.24 percent increase annually in household debt.
