W35tr floods back into banks as stock market slump drags on

Signs of a "reverse money move" — cash flowing back into banks after fleeing to the stock market — are emerging as the equity correction drags on. Both retail investors and corporations are actively opening fixed-term deposits, and total deposit balances have already surpassed levels recorded in the early days of the Lee Jae Myung administration, before share prices began their sharp ascent.

Fixed-deposit balances — covering individual, small and medium-sized enterprise, and large corporate accounts — at the five major banks of KB, Shinhan, Hana, Woori and NH NongHyup stood at 991.44 trillion won ($699 billion) as of Thursday, according to financial industry sources.

The aggregate balance had been 939.29 trillion won at the end of last year, climbed to 946.89 trillion won in February, then retreated to 937.46 trillion won in March and 937.18 trillion won in April.

The stock market played a major role in that early-year decline. Share prices plunged in March following armed conflict between the United States and Iran, but expectations that prices would recover on news of ceasefire negotiations spread through the market, triggering a money move out of banks led primarily by retail investors.

Corporate fixed deposits edged up about 1.4 trillion won over the period, from 500.41 trillion won at year-end to 501.89 trillion won at the end of April. Individual fixed deposits moved in the opposite direction, falling nearly 3.5 trillion won from 438.88 trillion won to 435.3 trillion won over the same stretch.

Deposit balances began climbing in earnest from June. The total reached 949.4 trillion won at the end of June and surged to 984.94 trillion won by the end of July — a gain of nearly 35 trillion won in a single month. As of Thursday, the balance of 991.44 trillion won represents an increase of nearly 60 trillion won compared with the 931.93 trillion won recorded at the end of June last year, just before the equity rally took off.

Analysts say the main driver has been the Bank of Korea and the US Federal Reserve signaling tighter monetary policy amid the prolonged Middle East situation, which has weighed on share prices. Kospi hit an all-time high of 9,331.55 on June 19, then swung repeatedly lower, touching 5,663.24 on July 29 before recovering to 6,258.77 on Friday. Individual fixed deposits rebounded in tandem, rising from 425.19 trillion won at end-June to 429.47 trillion won at end-July and 430.04 trillion won as of Thursday.

Investor deposits held in brokerage accounts — a gauge of money waiting to enter the market — stood at 104.07 trillion won as of Thursday, down 25.5 percent from the peak of 139.69 trillion won recorded on June 4, a drop over roughly two months.

"The stock market has shown some signs of life in August, but prolonged volatility appears to have worn investors down and they are coming back to banks," a commercial bank official said. "The fact that banks are rolling out special-rate products in response to the benchmark rate hike is also contributing."

The top rates on one-year fixed deposits at the five major banks currently stand at 3.20 to 3.30 percent annually, a modest increase from the high-2-percent range seen just before the Bank of Korea raised its benchmark rate in July. The reverse money move into risk-free fixed deposits is gaining momentum as the equity correction shows no sign of ending.

Corporate deposit growth is particularly striking. Balances rose from 509.59 trillion won at the end of May to 524.21 trillion won at end-June, then to 555.47 trillion won at end-July, and reached 561.41 trillion won as of Thursday. As with retail investors, rising market rates appear to be prompting companies to park surplus cash in fixed deposits, which carry no principal risk.

"Companies typically spread their surplus funds across foreign-exchange products for currency hedging, bonds and fixed deposits, but with market rates rising recently, demand has been concentrating in fixed deposits, which offer returns without risk," a commercial bank official said. "August in particular is when companies begin setting aside funds for next year's payment obligations, so they are entrusting money they absolutely cannot afford to lose to the banks."

Rising fixed-deposit balances are welcome news for banks, which can raise funds more cheaply through deposits than through other channels. Banks fund their lending through deposits and the issuance of bank bonds, but sourcing money through their own deposit-taking operations is understood to be less costly. Banks are already under pressure to sharply expand corporate lending in line with the government's productive-finance policy.

For borrowers, however, the trend is less encouraging. Higher funding costs push up the Cost of Funds Index, or COFIX, which serves as the benchmark rate for variable-rate mortgage loans. With market rates already rising, a further increase in COFIX could add significantly to the interest burden on borrowers.