Banks need new engines

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Banks need new engines

The banking industry will likely see slow growth next year on the back of a sluggish economy and low interest rates unless banks diversify their portfolios and profit structures.

According to a report by Hana Financial Group’s research center, Korean banks are heavily dependent on the profits they make from loan-to-deposit interest differences.

Without diversification, banks will see their margins shrink with a turgid economy and the central bank pushing a low interest rate policy.

Hana recently projected the economy to grow 3.2 percent in 2013, the same as the central bank’s estimate. The Korea Institute of Finance claims the economy will grow only 2 percent.

“The banking industry’s biggest factor is which direction the key borrowing rate is going to take next year,” said Han Jeong-tae, a researcher at Hana Daetoo Securities. “We expect loans to shrink around 4 percent while the net interest margin [NIM] is unlikely to move up.”

Koo Yong-wook, an analyst at KDB Daewoo Securities, said next year banks’ asset soundness is likely to be further damaged as overdue payments are likely to increase with such a sluggish economy.

There is a strong possibility that loan delinquencies, common among low-income borrowers, will rise among those who earn more.

The NIM, after reaching a 2.53 percent peak in 2010, has started to retreat. As of the second quarter of this year, it had fallen to 2.29 percent.

So banks are making less from interest. In 2009, commercial banks raked in 59.8 trillion won ($55 billion) in interest. That year, the total loans by commercial banks amounted to 842 trillion won.

Although at the end of last year loans amounted to 900 trillion won, interest stood at 59.1 trillion won. The size of loans may have increased, but the profits have shrunk.

Some analysts believe that with a low interest rate policy by the BOK and slow growth in the economy in general, the NIM could be sliced in half.

The Hana research center suggests that Korean banks follow Japanese banks by aggressively expanding overseas, particularly in emerging markets to develop new profit sources and to reorganize portfolios to include asset management services.

By Lee Ho-jeong []
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