Financial groups squeezed by big rate cut

The surprise cut in rates by the Bank of Korea Monday to record lows puts the banks between a rock and a hard place, forcing down margins just as bad loans are likely to roll in.

Banks in Korea are already suffering with low Net Interest Margins (NIM), and they could be further squeezed after the central bank took the benchmark rate down 50 basis points to 0.75 percent-- an all-time low as well as the first time for the base rate to go under 1 percent.

NIM is a key profitability ratio for banks. It measures the difference between income earned from loans and the interest paid out on deposits. The NIM has tended to decline as rates fall.

The interest margin for Korea’s commercial banks dropped from 1.67 percent to 1.56 percent last year. Four major banks - Shinhan, KB, Hana and Woori - shed an average of 10 basis points in their margins on-year in the fourth quarter of last year.

The latest big cut in the base rate is expected to accelerate the deterioration.

Shinhan Bank in its conference call last year said it expects the base rate to drop by 25 basis points in 2020. KB Kookmin Bank also said it expects two cuts this year, but by no more than 25 basis points each. Business strategies have to be overhauled as a result.

Shinhan said that the cut was larger than expected and that a further decline in the NIM is expected. Expectations for 2020 results have already been lowered, and it will have to adjust its strategy.

Major banks in Korea including Shinhan and KB Kookmin said they are considering a cut in savings rates to respond to the central bank’s decision, but when and how much the cut would be has not been decided yet.

Rates were already cut earlier this year, so it might be difficult to make another cut, especially one that keeps pace with the 50 basis point reduction by the central bank.

The Bank of Korea cut the base rate twice last year by 25 basis points each time. In response, most commercial banks in Korea lowered their savings interest rates early this year.

Shinhan Bank announced early this month that it would lower the rate for its major savings accounts from 1.5 percent to 1.25 percent starting on March 21. Interest rates on its major fixed-deposit accounts were lowered from 1.35 percent to 1.1 percent last week. KB Kookmin Bank lowered the interest rate on its one-year installment savings from 4.45 to 4.15 percent. Woori Bank’s rate on fixed deposits was dropped from 1.4 percent to 1.1 percent last month.

The market is already responding to the not-so-good outlook for the year.

Shinhan Financial Group, the No. 1 in the business by assets, fell 5.97 percent in trading Tuesday, closing at 25,200 won. KB Financial Group shares plunged by 7.01 percent and those of Hana Financial Group dropped by 9.4 percent.

Woori Financial Group, despite chairman Sohn Tae-seung buying 5,000 shares early this week, dropped 4.19 percent Tuesday.

“Capacity to generate profit will be critically damaged for financial companies this year including banks and insurance companies due to drop in NIM and investment return,” said Seo Young-soo, an analyst at Kiwoom Securities & Investment.

“The 50 basis point cut in base rate will result in an estimated 7 basis point cut in yearly NIM for banks,” said Kim Soo-hyun, analyst at Shinhan Financial Investment. “We had initially expected commercial banks’ NIM to rebound in second quarter but the latest big cut in base rate will delay the timeline to the fourth quarter.”

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]