Expectations not great, and banks don’t disappoint

Banks, one after another, yesterday released 2012 performance reports that were just as bad as the market expected.

KB Kookmin Bank was one of the first to announce a disappointing performance that saw operating profit for the nation’s leading bank shrink 25 percent to 1.9 trillion won ($1.7 billion) from 2.6 trillion won in 2011. Revenue was down 12 percent to 1.9 trillion won. Net profits plunged 31 percent to slightly above 1.3 trillion won.

The bank cited a significant decline in interest profit attributed to a lower margin as the main cause of the disappointing results.

Korea Exchange Bank, the nation’s fifth-largest, and its parent Hana Bank reported even worse results.

KEB said operating profit nose dived over 58 percent on-year to 864.8 billion won, while revenue was down nearly 12 percent at 9.78 trillion won. KEB’s net profit sank even further by : 60.58 percent to 639.5 billion won.

Hana Bank’s operating profit was down 48 percent on-year to 814 billion won. More alarming was an operating loss the fourth quarter of nearly 3.4 billion won.

Revenue was down 15 percent to 14 trillion won form 16.7 trillion won in 2011. Net profit was cut nearly in half, dropping 49 percent to 615 billion won.

Shinhan Bank, which is known to operate conservatively, was not immune, but it fared slightly better than others. Shinhan’s operating profit dropped 20.6 percent to 2.1 trillion won from 2.7 trillion won the previous year, on 1 percent lower revenue of 18.6 trillion won. Net profit lost nearly 20 percent to nearly 1.7 trillion won from 2.1 trillion won in 2011.

Woori Bank has yet to report its performance.

The disappointing performances had for the most part been predicted, while some even assumed the situation was much worse during one of the sector’s biggest challenges in recent years: the easing of monetary policy by the central bank that has been lowering the interest income while trying to attract new customers at a time of slowing growth.

The Financial Supervisory Service in a report released on Wednesday estimated the banking industry, including regional banks, suffered a 23 percent decrease in net profit last year. Net profit is expected to amount to 9 trillion won compared to 11.8 trillion won the previous year. Commercial banks alone are expected to see a combined decrease 23 percent on-year in net profit to 6 trillion won.

Net profit fell more in the second half of last year. After pocketing 3.3 trillion won in the first quarter, net profits are expected to have shrunk by more than half to 1.5 trillion won in the last three months.

This is more evident on the banks’ net interest margin, which is an indicator of profitability.

The net interest margin on average was 2.1 percent last year, which is a drop from 2.3 percent in 2011. However, the margin dropped sharply in the second half of 2012. In the first and second quarters, net interest margins were 2.19 percent and 2.14 percent, respectively. It fell to 2.06 percent in the third quarter and 2.01 percent in the fourth.

As a result, the profit that banks have been making from interest has fallen as well. Last year, it shrank 1 trillion won from 38 trillion won from a year earlier.

Interest income is crucial as it covers a substantial portion of net profits. Many Korean banks depend on interest income for more than 50 percent of earnings.

KB Kookmin Bank’s dependence on interest profit is estimated at over 65 percent, up from 53 percent in 2011, while Shinhan’s dependency is estimated to be more than 55 percent, up from 40 percent the previous year.

The interest rate on new loans last month on average was 4.84 percent, a record low.

Meanwhile, the difference between that and the deposit rate, which was 3.1 percent as of December, was also a three-year low. This means that bank profits have been shrinking. Additionally, while banks has been struggling to attract new customers with low interest on deposits, they have been under pressure from financial authorities to not increase lending.

“With the central bank keeping a loose monetary policy and pressuring us from increasing loans, the shrinking profit was inevitable,” said a bank official who requested anonymity. “There’s nothing much the banks could do at this point.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]