Banks’ mortgage spread increases raise questions

As the country’s household debt reaches record levels, a study released yesterday shows that banks last month raised their spreads on mortgages, and borrowers with poor credit ratings saw the largest increases.

A study by the Korea Federation of Banks said the average increase was 0.63 percentage point, but those with credit ratings between seven and 10 were paying as much as 2.33 percentage points more.

The increases were particularly acute at foreign banks.

Compared to February 2013, Standard Chartered Korea raised its mortgage spread an average of 0.33 percentage point to 0.98 percent and Citibank 0.32 percentage point to 0.97 percent.

Local banks also raised the spreads on their mortgage loans. KB Kookmin Bank’s spread was 0.19 percentage point higher, while Shinhan and Woori were up 0.06 percentage point, 0.03 percentage point more than last year.

Kwangju Bank, a regional institution, reported the highest average increase of 0.63 percentage point.

The situation, however, is worse for those with lower credit ratings between seven and 10, who saw a maximum hike of 2.33 percentage point, while the maximum hike for the top three tiers was 0.33 percentage point.

The National Federation of Fisheries Cooperatives was responsible for the biggest increase in the bottom tier, but it raised spreads for the top tiers just 0.02 percentage point.

The situation was the same for other banks. The spread increase for bottom tiers at Standard Chartered was 0.52 percentage point and 0.33 percentage point for higher tiers. At Citibank the top tier’s spread was 0.94 percentage point higher, while those on the other end of the credit spectrum saw a 1.09 percentage point increase.

Woori Bank increased the spread for the bottom tier 0.19 percentage point but lowered it 0.01 percentage point for the top tier.

Kyongnam Bank also lowered its spread for those with higher credit ratings, by 0.04 percentage point, while adding 0.03 percentage point for those with the lowest credit ratings.

The banks’ increase in spreads comes at a time when the central bank has kept the key borrowing rate at 2.5 percent for 10 consecutive months.

However, some have questioned if higher spreads on lower credit borrowers were necessary in light of the nation’s 1,021 trillion won ($953.8 million) in household debt.

Banks blame the central bank’s prolonged loose monetary policy, saying they had no choice but to raise spreads to boost revenues.

A recent report estimated the first quarter performance of banks would improve slightly compared to a year ago. FN Guide, a financial information provider, on Tuesday projected the net profit of the four major banking groups - KB, Shinhan, Woori and Hana - in the first quarter would increase 7.5 percent to 1.6 trillion won.

Some market experts speculate the situation is improving significantly for banks, especially with real estate rebounding and the economy on a recovery track.

“Overall, loans have grown 5.7 percent year-on-year, including corporate loans, which have seen their sharpest growth since September 2012 at 7 percent,” said Park Sun-ho, an analyst at Meritz. “Deposits have also added 5.4 trillion won. With such improvements, the profitability of banks will be improved.”

BY lee ho-jeong [ojlee82@joongang.co.kr]