Seoul: South Korea's four largest financial groups-KB, Shinhan, Hana, and Woori-achieved a combined net profit of 10.33 trillion won ($7.42 billion) in the first half of 2025, marking a new record in the banking sector's financial performance.
According to Yonhap News Agency, this substantial profit is largely attributed to the banks' strategic decision-making regarding interest rates, despite a series of benchmark rate cuts by the Bank of Korea since late 2024.
Korean banks have expanded their net interest margin by maintaining elevated lending rates while swiftly reducing deposit rates. This practice has allowed interest income to account for over 75 percent of total bank revenue, contrasting with the usual pressure to lower loan rates following base rate cuts. The average spread between lending and deposit rates rose from approximately 0.5 percentage points in 2023 to over 1.3 points in the first five months of 2025. This shift is facilitated by regulatory leniency and limited competition, enabling banks to achieve record profits with minimal risk.
Government policies have supported this risk-averse approach by focusing on household debt reduction and housing market stabilization, providing banks with political backing to maintain high lending rates. Moreover, state-backed mortgage products, which guarantee up to 90 percent of the principal, have minimized default risks and ensured stable returns for lenders. This approach has entrenched a conservative lending model that limits banks' traditional role as economic growth catalysts.
The broader economy is feeling the impact of this financial strategy, with sluggish growth, cautious corporate investment, and underinvestment in sectors like artificial intelligence, green energy, and biopharmaceuticals. Lending to small and medium-sized enterprises grew by less than 1 percent, whereas mortgage lending increased by over 4 percent in the first half of the year. This trend indicates a preference for asset accumulation over productive enterprise, posing a challenge to South Korea's long-term productivity and competitiveness.
President Lee Jae Myung has called for banks to reduce their reliance on interest income and take a more active role in bolstering the real economy. The Financial Services Commission is reportedly drafting guidelines to promote longer-term investments in venture capital, listed equities, and strategic sectors. However, these efforts require a comprehensive policy framework that incentivizes measured risk-taking and innovation lending to ensure the banking sector supports sustainable economic progress.
The implications extend beyond financial-sector efficiency. If banks continue prioritizing short-term profits over innovation-driven capital allocation, South Korea risks falling behind in the global economic race. It is imperative for banks to transition from passive observers of macroeconomic trends to active contributors to sustainable economic development.