Bank Deposit Rate Hits 6 Year High
Kookmin Offers Interest of Over 6%; Rising Rates Expected to Undermine Bottom Lines
By Lee Hyo-sik
Staff Reporter
Domestic lenders are raising interest rates on savings deposits to attract more funds as a growing number of depositors are taking money out of banks to put into brokerage firms' stock investment accounts for higher interest gains.
According to the Bank of Korea (BOK) Monday, the average one-year deposit rate of commercial banks reached 5.28 percent last month, up from 5.11 percent a month earlier. It is the highest level since July 2001 when the rate averaged 5.57 percent.
They have been marketing deposit products that offer higher rates to prevent customers from shifting their deposits to securities firms' cash management accounts (CMAs), as well as attract more fresh funds.
Kookmin Bank, the country's largest retailer, said Monday that it will offer a deposit product next month, which provides over 6 percent interest income per year. It will be the first time for domestic banks to market a deposit product with an interest rate of over 6 percent.
Banks have been losing customers to brokerage firms in recent months as people increase their investment in stocks amid bullish stock market runs and low interest rates for bank deposits. As of last Friday, outstanding balance of core deposits at local lenders stood at 112.8 trillion won, down from 119.5 trillion won in June.
Lenders used to attract funds through low-interest core deposits and extended loans to households and businesses at higher rates, generating easy profits. But the average net interest margin of Korean banks, a key gauge of profitability, has dropped sharply as they have competed to raise interest rates on deposit products, resulting in a fall in the gap between lending and deposit rates.
Also, to make up for shortfalls in savings deposits and raise funds for extending loans, banks have issued more bonds and certificate of deposits (CDs) this year, pushing up overall lending rates. Mortgages and other loan rates move in line with CD rates.
The average borrowing rate stood at 6.7 percent last month, the highest level since July 2002 when the rate was 6.72 percent. Outstanding balance of bonds and CDs issued by banks rose 68 trillion won to 352.1 trillion won in the first eight months of the year.