[NOTEBOOK]The Secret Behind H&CB's Profits

H&CB is Korea's most profitable bank － by far. Its shares were trading at 28,500 won ($22) Tuesday, more than 10,000 won above the bank with the second largest stock valuation.

The yardstick for a good bank is, of course, how profitable it is. As is the case with any business, it is important for a commercial bank to make money.

Even if a bank is aiming for profits, however, it should do so by playing fair and with decent means. It just cannot ignore the role it must play for the benefit of society. This is the logic applicable to almost all capitalist economies. If a bank neglects its duty to contribute to society or the public interest, its business will be ruined.

Why did I bring up this issue in the middle of a commentary about H&CB? Well, there is something suspicious about the way the lender is making money. At a time of low interest rates, the bank is making huge profits from loans it made in the past, when interest rates were much higher － particularly from mortgage loans extended to pay for small apartment houses for people in the low-income bracket.

According to local bankers, the average lending rate of H&CB tops an annualized 11 percent. That is nearly 16 percent higher than loans made by other commercial lenders at around 9.5 percent per year. On the assumption that banks have the same amount of exposure to loans, H&CB enjoys that much higher profitability.

Why is H&CB's lending rate so high? That is because the bank is maintaining the high rates on loans made in the past, despite a steep decline in the benchmark interest rates.

Let's take the apartment complexes in Sanggye-dong, northeastern Seoul. Commonly, owners of apartments in this area have around 20 million won to 30 million won of long-term mortgage loans. The interest rate at the time when they took out the loans ranged from 12 percent to 14 percent a year.

That rate is a staggering 50 percent higher than the current market rate. HSBC and Citibank currently charge 7.9 percent a year on their mortgage loans. The banks lent money at higher rates in the past but cut their rate in line with the falling local interest rates.

H&CB is well aware of this. It just pretends not to know it. Behind H&CB's disproportionate profits is its loan repayment structure, which makes it virtually impossible for borrowers to figure out whether they are paying too much interest or not.

For instance, those who borrowed 30 million won over a 30-year period are not aware of the difference because the percentage of interest in their monthly repayments － which are automatically taken from their bank accounts － is too small. Exorbitant interest on loans made in the past to people in the low-income bracket is filling the lender's coffers.

Arrears on such loans are almost nonexistent. For poor people, their apartments are almost all they have and thus they exert their best efforts in paying the arrears even at a hint of putting their homes on auction.

It remains to be seen how long H&CB will be allowed to make money in such a way.

The writer is international economic news editor of the JoongAng Ilbo.

by Shim Shang-bok