[Aftermath of 3% Rate Hike]③Broader Loan Access and Rising Rates... Banks’ Interest Income Expected to Grow Further

Four Major Banks Report KRW 19 Trillion in Interest Income in First Half
Benchmark Interest Rate Rises from 2.50% to 3.00% in Two Months
NIM Improvement Trend Expected to Continue in Second Half

As the benchmark interest rate increase coincides with the easing of household loan regulations, there are predictions that banks’ interest income will continue to rise. With lending rates going up and the net interest margin (NIM) improving, as well as the expanded capacity to supply loans, banks are now in a position to simultaneously grow their loan assets and margins.

On the 27th, the Monetary Policy Board of the Bank of Korea raised the benchmark interest rate by 0.25 percentage points from 2.75% to 3.00% per year. This marks the second consecutive monthly increase, following last month's rise from 2.50% to 2.75%. As a result, the benchmark rate has increased by 0.50 percentage points over two months.

An increase in the benchmark rate generally has a positive effect on bank profitability. Major commercial banks have a structure where interest rate-sensitive assets exceed interest rate-sensitive liabilities within six months, allowing them to expect an increase in interest income due to the benchmark rate hike. When lending rates rise faster than deposit rates, the interest spread widens, which also improves NIM, a key profitability indicator for banks.

Banks’ NIM continues its upward trend. In the second quarter of this year, the average NIM for KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank was 1.62%, up 0.07 percentage points from the same period last year. Kookmin Bank had the highest NIM at 1.74%, followed by Hana Bank and Shinhan Bank at 1.61% each, and Woori Bank at 1.51%.

Along with the improvement in NIM and the increase in loan assets, interest income has also grown. In the first half of this year, the four major banks recorded a combined interest income of KRW 18.9822 trillion, up KRW 1.5614 trillion (9.0%) from KRW 17.4208 trillion in the first half of last year. Hana Bank recorded the highest growth rate in interest income at 14.5%, followed by Shinhan Bank at 9.5%, Woori Bank at 6.9%, and Kookmin Bank at 5.9%.

Alongside the rate hikes, loan supply capacity has also expanded. On the 13th of this month, financial authorities raised their target for annual household loan growth in the financial sector from 1.5% to 3.0%. This is estimated to create an additional loan supply capacity of about KRW 30 trillion across the financial sector as a whole.

In particular, collective loans such as relocation expenses for reconstruction and redevelopment, as well as interim and final payment loans, will now be managed separately from individual financial companies’ own household loan growth targets. This allows banks to further expand housing-related lending. If both lending rates and loan assets continue to increase simultaneously, the growth in banks’ interest income could become even more pronounced.

However, there is a potential variable in that prolonged high rates could impair borrowers’ repayment capacity. If delinquency rates and non-performing loans rise, banks will have to set aside additional provisions for bad loans. While the four major banks recorded a 9.0% increase in interest income in the first half of this year, their net income only grew 1.0%, as the gain in interest income was partially offset by higher selling and administrative expenses, as well as increased provisions.

An official from the banking sector commented, “Though the benchmark rate hike is positive from the perspective of NIM and interest income, it is also important to factor in the increased funding costs due to higher deposit rates and the costs of credit losses resulting from borrower defaults.”

This content was produced with the assistance of AI translation services.