Deposit rates for corporate clients have climbed above 4%, an outcome widely expected as market rates rise at home and abroad. Expectations have firmed that the Bank of Korea may raise its policy rate again within the year, prompting some borrowers to lock in funds before market rates climb further. Bankers warn that higher deposit rates will eventually feed through to lending rates, adding to the burden on households that stretched their finances to the limit to buy a home.
Time deposits at the five major banks totaled 1,006 trillion won as of the 28th, according to financial industry data compiled on the 30th. The balance stood at 939 trillion won at the end of last year but grew rapidly after June, when the stock market entered a sideways phase. Time deposits surpassed 985 trillion won at the end of July and broke through 1,000 trillion won last month.
The roughly 70 trillion won surge in time deposits over nine months owed much to aggressive rate increases by banks. The one-year rate on Woori Bank's WON Corporate Time Deposit has risen 1.12 percentage points this year alone, to 4.09%. Its WON Plus Deposit for individual customers rose 0.65 percentage point over the same period, to 3.50%. NH NongHyup Bank and Shinhan Bank raised rates by as much as 1.1 to 1.2 percentage points, lifting one-year deposit rates well above 3.7%.
Banks are actively courting corporate money, which accounts for about 80% of time deposit balances. Because each corporate client deposits large sums, banks have an incentive to offer generous rates to secure funds in a single transaction. Corporate rates are also often negotiated with individual branches, so actual rates frequently exceed posted levels. "Once you establish a relationship with a corporate client, you can attract related business such as lending, retirement pensions and foreign exchange," an official in the financial industry said. "The many spinoff business opportunities are another reason rates are higher than for individuals."
Deposit rates offered to individual customers are rising as well. The one-year rate on NongHyup Bank's NH All-One e-Deposit stands at 3.55%, up 0.30 percentage point from the end of last month. The rate on Industrial Bank of Korea's IBK Rolling Account rose 0.26 percentage point this month. Banks are also sharply raising rates on short-term products and rolling out high-yield promotional offerings. Shinhan Bank on the 30th raised the three-month rate on its Sol Convenient Time Deposit to 3.10% from 2.85%. Woori Bank is running a one-month special sale of its All Together Installment Savings 2 product, which offers a 9% rate.
Market participants expect banks to keep raising deposit and lending rates for some time, given the unsettled bond market. The yield on five-year financial debentures (unguaranteed, AAA), the benchmark for fixed-rate and hybrid mortgages, has hovered above 4.6% this month, up from 3.49% at the end of last year. The 30-year U.S. Treasury yield topped 5.6% in intraday trading on the 29th, a 24-year high, adding to upward pressure on domestic market rates. "If the upward trend in rates continues, higher issuance rates on bank debentures may be unavoidable," an official in the financial industry said. "That shows up as a chain of increases in lending rates."
Higher deposit rates do feed into lending rates, with a lag. Deposit maturities have also been shortening recently. That is why Shinhan Bank raised its three-month deposit rate by 0.25 percentage point on the 30th. The result is a step-by-step rise in both deposit and lending rates. "As we move into a period of rising rates, more customers want to park their money short term," a Shinhan Bank official said.
Lending rates are already climbing sharply. The average rate on household loans extended by the five major banks last month, based on newly originated loans, was 4.90%, up 0.19 percentage point from the previous month, according to the Korea Federation of Banks. Fixed-rate mortgages at the five banks currently range from 4.91% to 6.88%. Some in the financial industry expect the top end of mortgage rates to exceed 8% within the year. That translates into heavier interest costs for households. Household loans at deposit-taking banks stood at 1,022.9 trillion won at the end of June, meaning a 0.1 percentage point increase in rates would add 1.0229 trillion won in annual interest payments by a simple calculation.
"The general view is that market rates will keep rising for a while," an official at a commercial bank said. "When rates on financial debentures and deposits go up, upward pressure on lending rates inevitably grows."
