Banks get some Q3 relief

Local banks posted better third-quarter results in which they made 1.7 trillion won ($1.6 billion) in net profits, up 70 percent compared to 1 trillion won in the previous quarter, the Financial Supervisory Service said in a release yesterday.

Despite improved earnings, however, concerns remain over financial institutions’ profit structure as the quarter-on-quarter net profit increase came not because of more business, but because they turned the previous quarter’s securities losses into a gain and there was a decline in credit losses.

Compared to a year ago, banks’ net profit was down 14.5 percent.

According to the FSS, 18 banks posted 1.7 trillion won in net profits from July through September, about 700 billion won more than in the second quarter.

With stock prices rising during the third quarter, banks gained 800 billion won from appreciation of securities. In the past several months, the Korean stock market has seen a massive inflow of foreign capital.

“Banks also saw their credit loss drop by 300 billion won in the third quarter with no big companies turning insolvent,” said an FSS official.

In the second quarter, local banks saw a huge credit loss as there were several companies whose financial sheets turned sour, including STX Group.

However, concerns are growing that factors that led local banks to post better results in the third quarter may not last long if stock prices go down and more companies turn insolvent due to worsened business conditions.

According to FSS data, Korean banks earned 8.6 trillion won in interest income in the third quarter, down from 8.7 trillion won in the previous quarter.

Their net interest margin, which is an indication of soundness and a gauge of profitability, was 1.81 percent, the lowest since the second quarter of 2009 (1.7 percent) when the Korean economy suffered from the effects of the U.S.-triggered global financial crisis.

Banks’ net interest margins have been in a decline since the first quarter of 2011, which analysts attribute to the low benchmark interest rate set by the Bank of Korea.

“Considering that local banks’ profit structure depends largely on interest profits, there is a need for them to find new sources of profit amid the low interest rate trend,” the FSS official said.

BY LEE EUN-JOO [angie@joongang.co.kr]