The banking sector has recently been unable to avoid criticism regarding 'interest-based profiteering' by not lowering loan rates under the pretext of managing household loans. In fact, while the interest income of domestic banks has been growing every year over the past decade, non-interest income has remained stagnant. This article examines the reasons why non-interest income, considered a symbol of banking innovation, has not grown and discusses realistic alternatives. [Editor's note]
Although the interest burden on borrowers is increasing, domestic banks are consistently achieving 'record revenue' every year through increased interest income. The proportion of interest income for domestic banks has been steadily rising, surpassing 90% since 2022. This year, banks have benefited significantly from interest-based transactions, leading to criticisms that they easily generate interest income through rate adjustments.
◇ The proportion of interest income has exceeded 90%
Analyzing the performance reports of 20 domestic banks from 2013 to 2023, Chosun Biz found that the interest income earned by banks reached a total of 423.6 trillion won. Yearly interest income increased from 34.9 trillion won in 2014 to 59.2 trillion won last year, marking a rise of 24.3 trillion won over the past decade.
The proportion of interest income compared to total income (interest income + non-interest income) has soared compared to 10 years ago. After rising from 89.5% in 2013 to 94.3% in 2022, it recorded 91.0% last year. It consistently maintained over 80% from 2015 to 2021, but surged sharply from 2022.
This year, it is expected that interest income will reach an all-time high. Typically, it is known that profits in the banking industry increase during periods of rising benchmark rates and decrease during periods of falling rates. However, even though the Bank of Korea lowered the benchmark rate to 3.0%, loan rates have been maintained due to the government's household loan regulation policies, creating a very favorable situation for earning revenue from interest.
The continuously widening interest margin (the difference between deposit rates and loan rates) supports expectations that this year will also see record-high profits. Deposit rates reflect the bank's funding costs, while loan rates represent income; thus, the interest margin directly correlates with the bank's profit. As of last October, the average interest margin of the five major banks (based on new transactions, excluding policy-friendly finance) was 1.036 percentage points, having risen for three consecutive months, exceeding 1 percentage point for the second time since the disclosures began in July 2022.
◇ Non-interest income is stagnant now as it was a decade ago
The issue is that non-interest income is stagnating or even falling behind. Over the past decade, the proportion of non-interest income has remained steady at around 10% after dropping from 9.1% in 2014 to 5.7% in 2022, recovering to just over 9% last year. While the absolute scale of interest income has risen significantly, non-interest income has either remained similar or decreased. Non-interest income was 3.5 trillion won in 2014, barely reaching 3.4 trillion won in 2022 and 5.8 trillion won in 2023.
Over the past decade, banks have focused solely on profits from interest margins without innovation through non-interest income. Non-interest income for banks includes fees from products associated with credit cards, trusts, and bancassurance; investment revenues from stocks, bonds, and real estate; as well as income from new innovations such as digital transformation and overseas ventures.
However, most of these efforts have been half-hearted. Bancassurance, where banks sell insurance products and earn commissions, has not gained much popularity, making it difficult to maintain steady income, and overseas net income has decreased by nearly 40% this year compared to last year based on the first half of the year. Digital transformation continues to focus more on strengthening competitiveness rather than immediate profitability.
Financial authorities also criticized banks for their interest-based profiteering, pointing out the skewed revenue structure focused on interest income without innovation. Kim Byung-hwan, the chairman of the Financial Services Commission, said at a press conference last October, 'In a high interest rate environment, there may be a lot of criticism. There needs to be innovation in various respects, such as the meaning of coexistence.' He added, 'Manufacturing industries that export products earn profits through competition and innovation in the export market, and I would like to ask if banks have been sufficiently innovative in that sense.'
Whenever criticism of interest-based profiteering has arisen in the banking sector or when lending rates have decreased putting interest income at risk, banks have claimed they would expand non-interest income. However, experts point out that the problem is that when a high interest rate environment occurs, these promises are pushed aside again.
Seo Ji-yong, a professor in the Department of Business Administration at Sangmyung University, noted, 'Whether in a high or low interest situation, banks need to consistently work to expand non-interest income, but many cases wherein they seem to 'flash' disappear when a high interest situation arises, resulting in stagnation of growth.'