Banks made big money last year in mortgages

Banks’ net profits hit their highest level in seven years in 2018 thanks to an increase in mortgage lending in the first three quarters of last year.

However, as the government tightened regulation on the real estate market and economic uncertainty is growing, the high profit that the banks have enjoyed is unlikely to continue, especially since banks have been lowering their interest rates.

According to the Financial Supervisory Service (FSS) Sunday, the net profits of banks increased 23.4 percent, or 2.6 trillion won ($2.31 billion), to 13.8 trillion won. While the net profit includes commercial banks, regional banks and the two internet banks, it does not include special-purpose banks, including the Bank of Korea or state-owned banks, such as the Korea Development Bank, Korea Export-Import Bank and NH Nonghyup Bank.

The net profit banks made last year was the highest since 2011, when they made 14.5 trillion won.

The banks made 40.3 trillion won last year from interest, an 8.2-percent increase compared to 2017 or 3 trillion won more. This is the first time banks have made more than 40 trillion won in interest alone.

The increase in profit was also boosted by falling credit costs, which fell 39.5 percent from the previous year to 4.4 trillion won. In 2017, credit costs were 7.2 trillion won.

The drop in credit costs was largely because banks last year got rid of insolvent bonds including the sales of Kumho Tire to China’s tire manufacturer.

Thanks to the increase in profits, the banks saw their corporate taxes increase 66 percent from 3.1 trillion won to 5.1 trillion won. The increase in corporate tax rate from 22 percent for the amount exceeding 300 billion won to 25 percent also contributed to the higher tax payment.

While banks made profits from loans, they actually saw profits decline in other businesses. They actually suffered a 24.3-percent decline in businesses outside of loans to 5.5 trillion won, which is 1.8 trillion won less.

The FSS cited decline in profits made from selling stocks and bonds and also shrinking profit from its FX and derivative profits due to the falling value of the Korean won against the dollar. Overall, banks’ profitability has improved. The return on assets was at 0.56 percent, up 0.08 percentage points from the previous year, while return on equity was at 7.1 percent, up 1.07 percentage points. But this year the situation could change.

According to a report by the Bank of Korea on Sunday, interest on banks’ household loans has been falling for four consecutive months despite the central bank raising the key interest rate in November from 1.5 percent to 1.75 percent.

As of January, the household loans interest rate is now at its lowest in slightly over a year, at 3.58 percent. Not only is this 0.03 percentage points lower than in December, but it is the lowest since October 2017, when it was at 3.51 percent.

The central bank cited the falling interest rate as being due to decreasing demand for mortgage loans as the government tightens regulation on the real estate market.

The Moon Jae-in government has restricted homeowners from taking out mortgages to buy new homes to curb the heated real estate market.

Since then, the market has been cooling as fast as it rose.

“The two hikes in interest rates on top of the government housing market’s stabilization measures have complemented each other in contributing to the slowdown in the increase of loans,” said BOK Gov. Lee Ju-yeol Thursday after the BOK froze its interest rates, citing economic uncertainty.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]