Profit margins are the worst since 2003,BOK reports

Korean companies’ operating profit margin for 2012 was the worst since the Bank of Korea began compiling data in 2003.

According to the BOK yesterday, the operating profit margin of 1,723 companies last year was 4.8 percent. In 2008, at the start of the global financial crisis, the margin was 5.7 percent.

The central bank studied 1,541 listed and 182 nonlisted companies. Financial companies, including banks and insurance firms, were not included.

“The [decline in average profit margin] reflects the struggling economy,” said Kim Kyung-hak, head of the corporate statistics department at the BOK.

While the profit margin for electronics companies grew 3.3 percentage points to 10.9 percent from 7.6 percent in 2011, the margin in the construction sector fell sharply from 1.8 percent to 0.2 percent.

In fact, the companies’ revenue expansion rate shrank sharply. The revenue growth rate of the companies averaged 5 percent in 2012, far below the 14 percent posted in 2011.

The petrochemical sector saw the steepest year-on-year drop, from 32.5 percent growth to 1.7 percent, while a shipping industry in the doldrums reported negative 0.3 percent growth in 2012 compared to a 6.4 percent increase in 2011. For companies in the automotive industry, sales growth fell to 3.4 percent from 19 percent.

Companies’ asset growth rate also dropped significantly to 4.9 percent last year from 8.3 percent in 2011. The fixed assets growth rate, an indicator of investment in facilities, dropped to 5.8 percent from 8.2 percent.

More alarmingly, companies’ interest coverage ratio fell to 375.1 percent from 418.4 percent. The interest coverage ratio shows a company’s ability to pay its loan interest from profits. Far worse, last year 32.7 percent of the 1,700 companies’ interest coverage ratio was below 100, compared to 28.3 percent in 2011. More than three out of 10 companies were unable to service their debt from profits in 2012.

“An interest coverage ratio below 100 means a company can’t pay its interest costs with the profits they make from sales,” said Kim of the central bank. “When a company’s interest coverage ratio remains below 100 percent for three years straight, it is deemed as a company that has reached its limits.”

The financial industry also is expected to be hit hard. According to financial information firm FnGuide yesterday, profits of major commercial banks in the first quarter this year are expected to tumble more than they did in the fourth quarter, with net profit likely to plummet 20 percent to 70 percent. In the first quarter, the firm estimated the combined net profit of the four major banking groups - Woori, KB Kookmin, Shinhan and Hana - to be 1.8 trillion won. This is nearly half of the 3.5 trillion won posted in the first quarter of 2012.

Hana is expected to suffer the most, with profit plunging 72 percent year-on-year to 364 billion won from 1.3 trillion won. Woori is expected to see net profit down 41 percent to 418 billion won from 714 billion won. Shinhan’s net profit is estimated to have dropped 33 percent from to 581 billion won from 868 billion won. KB Kookmin Bank’s net profit is expected to fall 24 percent to 460 billion won from 606 billion won in 2011.

The banks have been not only struggling from a stagnant economy and loose monetary policy that has kept interest rated low, but also the government’s economic movement.

But some experts see a turnaround in the second half of the year, especially since the government has proposed a 20 trillion won supplementary budget to stimulate the economy.

“Unless the economy gets much worse, the situation will likely improve in the second or third quarter of this year,” said an analyst at E*Trade Korea.

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