Banks to lower discretionary premiums amid criticism of profiteering, downtick in mortgage borrowings

By Lee Kyung-min

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The country’s top five commercial lenders are expected to lower discretionary premiums, a much-criticized means of defending their profit margins even when their borrowing costs dropped due to a Bank of Korea (BOK) key rate cut, market watchers said Monday.

Behind the collective move is heavy, continued criticism of profiteering, as evidenced by their lending-deposit rate differentials widening to up to 1.27 percentage points in November 2024, despite the central bank’s key rate cut of 50 basis points in the third quarter of last year. The wider the differential, the more the banks charge as interest.

Also at play is a downtick in mortgage borrowing this month, breaking eight months of rises since May. The January development weakens their justification against raising their premiums, long condoned by the financial authorities’ directive to curb the country’s world-leading household debt growth.

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A bank’s premium is the difference between the benchmark rate and the rate charged to borrowers. The benchmark rate factors in market and cost of funds, as determined by the cost of funds index (COFIX). Banks say their premiums include operation, legal and other costs, but the discretionary rate is set primarily to bolster their profits.

According to the financial market industry, Shinhan is likely to cut its premium this week, prompting its four peers — KB Kookmin, Hana, Woori and NH NongHyup — to follow suit.

Shinhan’s cut of up to 0.3 percentage point this week will end six months of uptrend since July, when its household loan products tied to bank debentures with three- and five-year maturities began to charge 0.05 percentage point higher.

KB Kookmin, Hana and Woori have yet to outline any details.

“We haven’t decided yet,” a Woori official said. “The recently sliding bond yields are being reflected in the interest rates to some extent. We are still monitoring the situation.”

The five lenders’ combined outstanding household loans came to 733.7 trillion won as of Jan. 9, down 3.66 trillion won from the end of 2024. It was the first dip in household loans since March 2023.

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Whether the BOK’s potential rate cut on Thursday would give them greater room to cut their premiums remains to be seen.

The fixed rate on five-year bank debenture mortgage loans granted by KB Kookmin, Hana, Woori and Shinhan came to a range of between 3.83 percent and 5.81 percent as of Jan. 10.

The figures for the one-year unsecured loans stood between 4.03 percent and 5.58 percent.

They edged down 0.26 percentage point and 0.13 percentage point, respectively.

However, the decline was not as sharp as the five-year, one-year benchmark rates that ticked down 0.3 percentage point and 0.395 percentage point, respectively.

This was because banks kept their premiums high.