Banks raise time deposit rates, signaling reverse money move [Money Mwoni]

South Korean banks have begun raising interest rates on time deposits as market rates climb.

According to industry officials Thursday, Hana Bank raised the one-year rate on its "Hana Time Deposit" product to 3.3 percent from 3.2 percent. The move follows an earlier increase in July, when the rate rose 0.3 percentage points from 2.9 percent.

Woori Bank also recently raised the rate on its flagship "WON Plus Deposit" product by 0.2 percentage points, to 3.4 percent from 3.2 percent.

On top of the Bank of Korea's benchmark interest rate hikes, market rates have been climbing worldwide, pushing banks' time deposit rates toward the mid-3 percent range.

According to the Korea Federation of Banks, KB Kookmin Bank is offering its "KB Star Time Deposit" at 3.2 percent, while Shinhan Bank is offering its "Shinhan My Plus Time Deposit" at 3.3 percent.

NH NongHyup Bank is selling its "NH Waltz Rotating Deposit II" at 3.25 percent.

As time deposit rates climb, a reverse money move — funds flowing back into bank deposits — is also gaining momentum. Time deposit balances at the five major lenders — KB, Shinhan, Hana, Woori and NH — reached 1,005.23 trillion won ($2.48 trillion) as of the end of August. It marks the first time the combined balance has topped 1,000 trillion won.

Compared with the buoyant first half of the year, a prolonged correction in the stock market has fueled a rush into time deposits, particularly among retail investors. Companies are also actively parking settlement funds, money they cannot afford to lose, in time deposits, according to industry officials. According to the Korea Financial Investment Association, investor deposits held in brokerage accounts awaiting stock investment rose from 87.83 trillion won at the end of last year to 121.63 trillion won in June. The figure then plunged to 99.70 trillion won by the end of August.

However, rising deposit rates are not good news for borrowers. The new Cost of Funds Index, or COFIX, which serves as the benchmark rate for variable-rate mortgages, is a weighted average of banks' funding costs, including those from time deposits and bank bonds. As deposit rates rise, so does the new COFIX, which in turn pushes up interest rates for borrowers with variable-rate loans. With bank bond yields already climbing amid rising market rates, the added increase in deposit rates is expected to accelerate the pace of the new COFIX's rise.