Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the central bank's headquarters in Seoul, Friday. Joint Press Corps

The end of the Bank of Korea's (BOK) prolonged policy interest rate freeze is bringing mixed reactions across different financial sectors. While some sectors such as credit card firms may benefit from the change, others such as banks are apprehensive about the potential impacts on their profitability.

The central bank lowered its key interest rate by 25 basis points to 3.25 percent Friday in its first rate cut since August 2021 in an effort to boost economic growth.

According to a report released by the Korea Investors Service on Sunday, credit card companies and the capital finance industry are expected to benefit the most from the interest rate cut.

Since credit card and capital companies do not have separate deposit functions, they raise funds primarily by issuing bonds. A reduction in the benchmark interest rate typically leads to a decline in market interest rates, which is likely to alleviate the cost burden of financing for these sectors.

The securities industry is also expected to view the change positively, as an interest rate cut typically leads to an increase in demand for riskier assets, such as stocks. This can result in a rise in trading volumes, boosting the revenues of brokerage firms.

On the other hand, banks and insurance companies are sectors that do not welcome the interest rate cut.

For banks, the difference in the speed at which the benchmark rate reduction is reflected in loan and deposit rates can lead to falling interest margins. This narrowing of their margins raises concerns about deteriorating profitability, as banks may face lower earnings from loans while still paying interest on deposits at competitive rates.

Insurers also view the interest rate cut unfavorably.

The International Financial Reporting Standard (IFRS) 17, a set of new global accounting standards which was implemented last year, requires that insurance liabilities be calculated at present value, not book value. When the interest rate declines, the discount rate used for these liabilities decreases, resulting in rising liabilities.

Additionally, since insurance firms hold a significant portion of their assets in bonds, the lower interest rate typically leads to reduced returns on these investments. This combination of rising liabilities and declining asset yields can negatively impact the overall profitability of insurers.

However, there is a possibility that the impact of the latest interest rate cut may not function as theoretically expected.

One variable to consider is that expectations of an interest rate reduction have already been reflected in market interest rates for an extended period.

There is also the factor of the pressure on household debt management from the financial authorities.

If banks raise loan rates despite the benchmark interest rate cut in order to manage household debt levels, it could lead to an increase in their interest margins.