South Korean commercial banks are facing a severe margin compression cycle as heightened competition drives 1-year time deposit rates toward 4%. Major lenders have seen low-cost demand deposits contract by billions of KRW while high-yield fixed deposits surged, squeezing net interest margins and creating complex policy dilemmas across the financial sector.
Fixed-rate deposits grow as low-cost demand deposits shrink
- Deposit Mix Shift: Fixed-rate time deposits across major commercial lenders expanded by 59.88 trillion KRW to reach 1,009.28 trillion KRW by September 18, 2026.
- Cost of Capital Pressure: Low-cost demand deposits shrank by 51.49 trillion KRW to 647.23 trillion KRW over the same period, forcing up average bank funding costs.
- Net Margin Contraction: New-take loan-to-deposit rate spreads narrowed by 0.17 percentage points to 1.06% in July, marking six consecutive months of contraction.
Rising Deposit Rates and the Shift in Bank Funding Structures
South Korean banking institutions are grappling with shifting balance sheet dynamics as retail and institutional depositors chase higher yields. Market competition and rising market interest rates have pushed 1-year time deposit averages to approximately 3.47%, with top-tier commercial offerings touching 3.99% and sitting squarely on the threshold of the 4% barrier.
Major financial institutions have had to adjust their product offerings upward to prevent capital flight. KB Kookmin Bank set its ‘KB Star’ 1-year fixed deposit at an annual rate of 3.50%, matching similar pricing strategies seen at Woori Bank with its ‘WON Plus’ product. NH Nonghyup, Shinhan, and Hana banks have also adjusted their pricing structures, compressing the yield gap between commercial banks and internet-only lenders.
The figures are as follows. Between the end of June and September 18, 2026, aggregate fixed deposits at South Korea’s five major commercial banks climbed to 1,009.28 trillion KRW, representing an influx of 59.88 trillion KRW. But the balance sheet tells a different story regarding cheap liquidity: traditional demand and checking accounts contracted by 51.49 trillion KRW down to 647.23 trillion KRW.
Data Breakdown of Major Commercial Bank Balances
| Deposit Category | June End Volume (KRW) | September 18 Volume (KRW) | Percentage Share Change |
|---|---|---|---|
| Time/Fixed Deposits (Top 5 Banks) | 949.40 Trillion* | 1,009.28 Trillion | 42.1% to 44.4% |
| Demand/Low-Cost Deposits (Top 5 Banks) | 698.73 Trillion* | 647.23 Trillion | 31.0% to 28.5% |
Spreading Pressures on Net Interest Margins and Loan Pricing
The structural pivot from low-cost transaction accounts to expensive fixed-term deposits is directly eroding bank profitability. Transaction accounts allow lenders to secure capital at minimal interest, whereas 3% range time deposits dramatically elevate overall funding costs.
Data from the Bank of Korea confirms this trend. In July 2026, the average rate for newly issued savings-type deposits rose by 0.13 percentage points to 3.21%. Conversely, composite lending rates for households and corporations fell by 0.04 percentage points to 4.27%. As a result, the new-take loan-to-deposit spread narrowed to 1.06 percentage points, marking the sixth straight monthly decline since February.
A similar contraction occurred across the five major banking groups, where average loan-deposit spreads tightened from 1.19 percentage points in June to 1.03 percentage points in July, according to disclosures from the Korea Federation of Banks.
The Policy Dilemma Facing Credit Institutions
Lenders now face a difficult strategic compromise. Failing to match competing deposit rates risks capital outflows to rival institutions. However, aggressively raising deposit rates places direct upward pressure on the Cost of Funds Index, commonly known as COFIX, which dictates variable-rate mortgage pricing.
Yet, passing these higher funding costs onto retail borrowers remains politically and operationally fraught. Financial regulators continue to press major institutions to manage household debt growth and protect vulnerable borrowers from excessive financial burdens, leaving banks caught between rising liabilities and constrained lending revenue.
Disclaimer: The information provided in this article is for educational and informational purposes only and does not constitute financial advice.
