Five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank) have seen over 15 trillion won exit their demand deposits in the first half of this month, raising concerns about a potential increase in loan interest rates. The Cost of Funding Index (COFIX) is declining, yet the scope for reducing the additional charge is not increasing, leading to worries that the decrease in low-cost deposits will raise banks' funding expenses.
According to the financial sector on the 18th, the combined demand deposits of the five major banks (excluding savings deposits such as Money Market Deposit Accounts) decreased by 15.2141 trillion won from 530.4327 trillion won at the end of last month to 515.2186 trillion won as of the 15th of this month. Demand deposits refer to short-term funds that can be withdrawn at any time, unlike savings deposits. With demand deposit interest rates at around 0.1%, banks can secure funding at low rates, aiding their revenue improvement.
In connection with this significant outflow of demand deposits this month, there is an analysis that the tariff policy of former U.S. President Donald Trump caused domestic and foreign markets to fluctuate, increasing demand for buying at low points. According to the Korea Securities Depository, the net purchasing amount of U.S. stocks by domestic investors during the past week (from April 4 to April 10) reached $1.86676 billion (about 2.7 trillion won), which is about five times higher than the $374.75 million recorded two weeks ago (from March 21 to March 27). Furthermore, there are interpretations that this is aimed at catching the last train of deposit and savings interest rates during the falling base rate period.
With such a significant outflow of demand deposits in a short period, concerns are rising in the market about the funding expenses of banks for loans. A large amount of demand deposits is necessary to reduce banks' costs of procuring loan funds. Rising funding costs may lead to an increase in the COFIX, which is the standard for calculating variable interest rates on bank housing mortgage loans and jeonse loans.
Recently, while the COFIX is on a downward trend, the additional charge has not decreased, leaving the burden of loan interest rates unchanged, compounded by concerns of a COFIX increase. The COFIX can rise or fall depending on whether the interest rates on deposited funds, such as deposits and bank bonds, actually handled by banks increase or decrease. Currently, the COFIX is at its lowest level since 2022, falling by 0.13 percentage points from the previous month to 2.84% in March. According to the Bankers Association, the additional charges of the five major banks were 3.01% last month, an increase of 0.24 percentage points compared to the same period last year (2.75%).
However, a bank official explained that “since demand deposits and MMDA balances increased significantly ahead of the March settlement of accounts, the outflow of this increased funding may be a temporary phenomenon.” Indeed, the demand deposit balance of the five major banks surged nearly 25 trillion won from 625.1471 trillion won at the end of February to 650.1241 trillion won at the end of March.