Tighter ratios to erode bank earnings

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Tighter ratios to erode bank earnings

Korean banks are expected to see their earnings drop sharply this year, as they face stricter reserve requirements for distressed assets and an economic slowdown hurts their overall performances, the country’s financial watchdog said yesterday.

The combined net profit of local lenders is estimated to reach 9 trillion won ($8.05 billion) this year, down 24 percent from the record 11.8 trillion won posted last year, according to the Financial Supervisory Service.

Banks have seen a steady increase in net profits since the 2008 financial crisis stirred by the collapse of the Lehman Brothers investment bank in the United States. They reaped a combined profit of 7.7 trillion won in 2008 and 6.9 trillion won in 2009. Their profits spiked to 9.3 trillion won in 2010.

However, the earnings forecast for this year has turned dim, as profit sources erode on sagging domestic demand, hit by the global slowdown, market watchers said.

Bank performances could be even worse next year, as they are required to secure more loan loss reserves to brace for an increase in bad debts, they said.

“Conditions could get worse next year, and the rosy days for banks are over,” a FSS official said.

Banks have been faced with a requirement to lower their bad debt ratio to 1.3 percent by the end of this year from the current 1.51 percent as of end-June. Their performance will likely be further overshadowed by stricter global supervision rules, known as the Basel III, which can take effect as early as next year in Korea, the FSS official said.

Meanwhile, earnings for local credit card companies are also projected to drop this year, as stiffer regulatory measures, including lower commission rates, will likely spur a profit squeeze, according to the regulator.

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