Rate cut won’t squeeze bank income

Last week’s surprise interest rate cut by South Korea’s central bank will unlikely erode local lenders’ interest income significantly and will instead help improve their asset quality, a report said Tuesday.

Beating market expectations, the Bank of Korea unexpectedly lowered the July level of the benchmark 7-day repo rate by a quarter point to 3 percent on Thursday, marking the first rate cut since February 2009.

According to the report by Switzerland-based brokerage Credit Suisse, the rate reduction is expected to lower local banks’ net interest margin, a key measure of profitability from lending, by a mere 0.02 percent point.

That’s because the bellwether interest rate is not the only factor that determines banks’ net interest margins, the investment bank said.

The brokerage said that South Korean banks will likely lower their interest on savings to maintain appropriate loan-deposit spreads in a bid to cope with the rate reduction.

Credit Suisse said the interest rate cut is expected to help improve the health of local banks’ assets and ease the interest burden on corporate and household borrowers.

According to an estimate by the Financial Supervisory Service, the rate cut will likely trim interest payments by households and corporate borrowers by 2 trillion won ($1.74 billion) annually. 

(Yonhap News)