Banks reach highest Q1 profit from loan-deposit margins

Net profit at Korea’s top five financial holding companies exceeded five trillion for the first time in history. Net profit of KB, Shinhan, Hana, and Woori Financial Holding Companies rose 8-32% year-on-year for the first quarter, while NH saw a slight decline in net profit only. Such performance is attributable to raising loan interest rates higher than deposit rates, while base interest rates rose 1 percentage point over the last four rounds since August last year.

It is no secret that banks earn profit out of loan-deposit margins, but the recent scale of profit at banks are unprecedented. Such profit growth comes from noticeable growth in interest margin, as banks saw increased liquidity from money invested in real estate returning to banks. Fixed deposit of six months or shorter at key banks rose 55% over a year, while loan-deposit margin rose 0.3 percentage point in just two months. Financial companies were able to see interest profit due to liquidity abundance and interest rates, not because of better sales performance.

Unlike the banks’ performance, households are suffering from interest rate burdens. Overall household lending has reached 1,862 trillion won as more people fully take out loans, using the money to invest in stocks. A 1 percentage point increase in base point interest results in extra interest of 880,000 won for each household. It is avaricious of the banks to focus on making money from loan-deposit margin when they have achieved highest performance last year while the people suffer from higher interest burdens.

Banks are key institutions that provide liquidity to the national economy by performing payment, settlement, and credit functions. The government grans exclusive business rights to banks because their role differ from other private businesses, whose priorities are set on maximizing profits. Banks should be sharing the burden of higher interest rates, rather than taking advantage of them, when there are 380,000 households at the risk of defaulting. Banks should play a responsible role in this situation, taking Moody’s warnings seriously that Korea has one of the highest levels of debt among developed countries. Banks should consider ways of disclosing their loan-deposit margin structure and come up with ways to help vulnerable households to ease borrowing burdens.