Banks’ Q2 performance falls short

Banks’ second quarter performance has fallen short of earlier market projections. But hits to earnings were already widely expected in the market, as the central bank’s loose monetary policy has driven depositors to seek new, higher-yield investments, and dwindling loans have been eating into banks’ profits. To add to the burden, the ongoing economic stagnation that has increased defaults on corporate loans has only gotten worse.

The major difference with the first three months of the year, however, is that there is a growing sentiment that the situation might turn around in the second half, largely thanks to economic recovery and the government’s forceful efforts to bolster the struggling real estate market.

Hana Financial Group was the first among the top four local banking groups to announce its April-June performance, on July 19. Its net profit in the second quarter was 266.9 billion won ($239 million), which is less than the forecast 300 billion won.

First half net profit, which was 556.6 billion won, was down 63.6 percent from the first six months of 2012.

“In the second quarter, profit continued to fall as competition [among banks] was fierce and the loose monetary policy remained,” said a Hana official.

The situation wasn’t much different for KB Financial Group. On Friday the second-largest banking group by assets said its net profits in the second quarter nosedived 70 percent from a year earlier, to 165.3 billion won. This is far worse than the first three months, which saw net profits tumble 32.2 percent from a year ago. As a result, profits in the first six months were 50 percent less than a year ago, at 575 billion won.

The biggest reason behind the drop was the slowdown in banking services. Flagship KB Kookmin Bank saw its net profit plunge nearly 90 percent to 48.8 billion won in the second quarter.

“In the first half, profits made from the difference between profit made from loans and interest payments made to depositors shrank sharply,” said a KB official.

Shinhan Financial Group is scheduled to announce its performance on Tuesday while Woori Financial Group plans to do so on Aug. 6.

“It’s hard to place significant meaning [on the second-quarter results] as the market’s expectations lowered quickly,” said Kim Soo-hyun, a researcher at Shinhan Financial Investment Corp.

But the stock value of these banks has been rising since June. There are growing expectations that the situation is likely to improve, as the economy performed much better in the second quarter. In addition, the government’s push for a permanent lowering of the acquisition tax is expected to help boost the real estate market, which will help further decelerate the banks profitability fall.

“After hitting the lowest points in June, bank shares have risen roughly 10 percent,” said Ha Hak-soo, an analyst at E-Trade Securities last week.

“This is the industry that saw the fourth-sharpest increase lately, after shipbuilding, energy and petrochemical, and steel,” the analyst said. “The common character of these industries is that they are sensitive to the economy.”

In fact the BOK’s second-quarter economic growth estimate announced on Thursday overturned previous projections. The economy was expected to make an expansion similar to that of the first three months of this year, around 0.8 percent or 0.9 percent on-quarter.

However, the central bank assessed that the economy in the April-June period expanded 1.1 percent compared to the first quarter, largely thanks to increased government spending, which includes investments made on infrastructure development. It was the first time growth broke the 1 percent barrier since the first quarter of 2011. Many are expecting the situation to continue, and the central bank was confident that the economy would likely reach its revised target of 2.8 percent. The central bank earlier raised its outlook from 2.6 percent. The Finance Ministry also revised its outlook from 2.3 percent to 2.7 percent.

“What is important in the second quarter performance is that net interest profits have increased compared to the previous quarter and that performance in the second half will likely improve,” said an analyst at KDB Daewoo Securities.

BY lee ho-jeong [ojlee82@joongang.co.kr]