Banks’ interest margin at record low

By Choi Kyong-ae

Korea’s commercial banks posted a record low net interest margin in the first quarter as loan-to-deposit ratios plunged because of declining interest rates, the Financial Supervisory Service (FSS) said Monday.

For the three months ended March 31, the country’s 18 banks reported a 163 percent net interest margin ?the lowest since the financial regulator began to compile data in 2003, the FSS said in a statement.

The interest margin, the difference between lending and deposit rates, is a key indicator measuring banks’ profitability.

“As interest rates are declining, banks are expected to suffer squeezed interest margins and a lack of cash cows in the nearly saturated domestic market,” said an official at the FSS Bank Supervision Division.

The official said there seemed to be few opportunities for domestic banks to make profits as their earnings based on interest income and commissions were unlikely to improve.

The banks have therefore been strengthening their drive to seek growth overseas, particularly in emerging markets where banking systems have yet to be developed.

Meanwhile, the 18 banks, including KB Kookmin, Shinhan, Hana and Korea Exchange, posted a 21 trillion won ($1.9 billion) combined net profit in the January-March period. This was up 62 percent from a year earlier, according to the statement.

“The surge in net income was far from any substantial improvement in fundamentals,” said the FSS official. “It was mainly due to one-off gains such as corporate tax refunds in the first quarter of each year and increased prices of government and public bonds.”

He said that as interest rates fell, bond prices would rise. So the net profit was buoyed by falling interest rates, not sales operations.

In the first quarter, the banks collectively registered 83 trillion won in interest income, down 3 percent from 85 trillion won a year before. The net interest margin was 18 percent in the January-March period in 2014, the statement said.

Their loan loss provisions-related costs increased 10 percent year-on-year to 27 trillion won in the first quarter from 24 trillion won, it said. Banks are required to put aside some loan loss provisions in case borrowers fail to repay debts.

The banks’ combined net profit fell to 6 trillion won last year from 87 trillion won in 2012 affected by fierce competition between domestic and multinational banks and lower rates, the statement said.

On top of narrowing interest margins, asset quality worsened in the first quarter

At Shinhan and Woori banks, the ratio of non-performing loans to assets, a key measure gauging the quality of assets, fell from the previous quarter, while other banks posted higher non-performing loan ratios.

Shinhan cut its non-performing loan ratio to 098 percent in the first quarter from 103 percent in the fourth quarter Woori Bank cut the ratio to 194 percent from 21 percent.

Other banks’ non-performing loan ratios increased. At KB Kookmin the ratio rose to 128 percent from 126 percent and at NongHyup to 164 percent from 162 percent.

Hana’s ratio also increased to 124 percent from 118 percent. IBK posted 146 percent, up from 14 percent the previous quarter

SOURCE: The Korea Times

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