The loan-to-deposit ratio of the five major banks has fallen to its lowest level in three years. As demand deposits and time deposits both increased, deposit balances swelled, while loan growth slowed. Banks are now actively channeling funds into time deposits, creating room to expand lending more aggressively. With recent discussions even suggesting exceptions to household loan volume regulations for group loans such as balance-of-payment loans, expectations are growing that the loan-to-deposit margin will widen in the second half of the year.
According to financial industry data released on the 2nd, the average loan-to-deposit ratio at the end of the second quarter for KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup Bank stood at 94.9%, down 110 basis points (1BP=0.01 percentage point) from the previous quarter. This marks the first time since June 2023 (94.9%) that the ratio has dipped below 95%.
The sharp decline in the loan-to-deposit ratio was driven by a surge in deposit balances. At the beginning of the year, strong stock market activity triggered significant money flows into equities, shrinking bank deposit balances. However, starting in May when the KOSPI index broke through the 8,000-point mark for the first time in history, profit-taking funds began flowing back into banks, causing both time deposits and demand deposits to rebound.
Banks are actively seeking deposits ahead of further interest rate hikes to lower funding costs. In particular, they are focusing on recruiting funds through time deposits, which lock money in for a fixed period. Time deposits have increased for three consecutive months since May, rising by 24.943 trillion won in July alone. This contrasts sharply with demand deposits, which allow flexible withdrawals and fell by 55.1193 trillion won over the same month.
A banking industry official explained, "From a bank's perspective, receiving funds as demand deposits is more advantageous from a profitability standpoint." They added, "Recently, banks have been offering special deposit products with rates around 4% to take advantage of capital outflows from stocks and encourage customers to keep their money in the bank."
With these secured deposits, banks may gain greater capacity to execute loans. While household loans remain subject to volume regulations, recent moves are underway to ease restrictions aimed at protecting genuine borrowers. Financial authorities are reviewing proposals to exempt group loans—including construction progress payments, balance-of-payment loans, and relocation expenses—from household loan volume caps. Previously, they urged major commercial banks to ensure smooth execution of balance-of-payment loans for apartment households scheduled to move in during the second half of the year. However, since the overall framework of volume regulation remains in place, it is highly likely that any expansion in bank lending will focus on corporate loans rather than household loans.
Net interest margin (NIM), which fell short of market expectations in the first half, also appears poised for improvement going forward. Market analysts suggest that since banks have already secured funding in advance, funding pressures should ease in the second half. In fact, as of the end of the second quarter, the average NIM for the five major banks rose only 1 basis point from the previous quarter to 1.62%. Notably, Kookmin Bank was the only one among the five to experience a decline in NIM compared to the prior quarter.
A financial industry official stated, "In the second quarter, attracting large amounts of deposits became a burden on funding costs." They projected, "Starting from the third quarter, as funding demand decreases and banks gain greater lending capacity using pre-secured funds, NIM is expected to improve more significantly."
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