Banks’ Gap between Loan-Deposit Rates to Grow Further

In a serial move, banks have started to increase deposit rates and loan interest rates, as the open market rate has been rising sharply of late.

However, loan interest rates are increasing at a greater rate and more rapidly than deposit interest rates, thereby placing heavier burdens on the shoulders of households and corporations. Analysts warn that this could have a serious consequence on the current signs of economic recovery in some areas.

Bank circles on February 18 noted Kookmin Bank, Chohung Bank, Hana Bank and Korea First Bank recently increased their floating mortgage loan interest rates by 0.1 to 0.2 percentage points from those of late last year.

Mortgage interest rates, which account for about 60 percent of banks’ household loan balances, are determined automatically by those of three-month-long certificate deposits.

The mortgage loan interest rate of Kookmin Bank stood at 5.31 percent this month, up 0.19 percentage points from late last year’s annual 5.12 percent. Chohung Bank and Korea First Bank also joined the move by raising their mortgage loan rates 0.2 percentage points. For its part, Hana Bank upped its rate by 0.1 percentage points.

Fixed rates display a far greater increase than floating rates, even though they are for the same mortgage loans.

Korea First Bank decided to raise the interest rate for two-year-long house mortgage loans from the present annual rate of 5.4 percent to 5.8 percent and to increase that of three-year-long loans by 0.4 to 0.7 percentage points, from 5.6 percent to 6.3 percent starting February 21.

Rates applied during the deferment period (when one does not redeem principal money but pays interest only) of long-term mortgage loans also went up.

Recently, Kookmin Bank raised its interest rate applied to products of three-year-long deferment periods by 1.01 percentage points from late last year’s annual 5.3 percent to 6.31 percent.

In sharp contrast to this, Shinhan Bank and Korea Exchange Bank project to distinguish themselves by allowing managers of branch offices leeway to inch down interest rates for long-term mortgage loan customers.

In the meantime, banks are taking their time to increase deposit rates, unlike their recent prompt raises of loan rates.

Only five banks (Kookmin Bank, Hana Bank, Woori Bank, Korea First Bank and the National Agricultural Cooperative Federation) have recently increased their regular deposit interest rates. Their increase stopped short at a mere 0.05 to 0.3 percentage points, varying according to the amount of money and length of their customers’ membership.

Accordingly, banks expect to earn profits with ease, as the loan-deposit margin, which is a gap between loan rates and deposit rates, grows.

According to the Bank of Korea, the disparity between loan and deposit rates, which was marked by only 1.90 percentage points in the third quarter (July to September) of 2002, expanded to 2.17 percentage points in the fourth quarter (October to December) of last year.

Financial experts assume that the normal increase in loan-deposit interest rates margin when interest rates increase illustrates the recent bigger increase in the margin when the rates have gone up dramatically.

Presidents of banks, meanwhile, said on February 18 at the financial conference held at the Bank of Korea, “The increase in rates won’t be great as the bond market is stable, though we are now raising deposit rates to fight off alternative products (like trust deposits) and loan rates as they are pegged to certificate deposits.”

Kyung-Joon Chung Seung-Jin Kim news91@donga.com sarafina@donga.com