Bigger margins, troubles at savings banks a boon for major banks


Korean banks are expected to post a record profit in the third quarter of this year, helped by wider margins as lenders hiked loan rates but lowered deposit rates.

Margin in the banking sector refers to the percentage added to a market rate of interest, or subtracted from a market rate of deposit, a key measure reflecting the profits banks can reap. The bigger the margin, the better the bottom lines.

The only problem with the bigger margins for Korean lenders is that they took advantage of the state-guided tightening of loan standards for households. Citing the toughened restrictions, the banks quickly raised the interest rates for household loans. Incidentally, as several Korean savings banks stumbled into suspension of operations, individual customers flocked to major banks, sparking a shift of funds that resulted in lower deposit rates at the frontrunners.

The Bank of Korea data show that households had to swallow an annualized interest rate of 5.58 percent when taking out a loan from banks in August, up from 5.46 percent in July. In contrast, the benchmark deposit rate edged down to 3.76 percent in August, from 3.79 percent in July.

The greater margin the banks secured are now expected to be reflected in their bottom lines for the July-September period.

According to the Financial Supervisory Service, Korean banks combined produced a profit of 4.5 trillion won in the first quarter and 5.5 trillion won in the second. Earlier, local lenders were expected to post lower earnings due to fierce competition in marketing, but the latest survey by financial information provider FnGuide, their performances might outperform expectations in the second half of this year.

Eight major banks including KB, Shinhan, Hana and three financial holding firms are likely to post a net profit of 3.2 trillion won ($2.7 billion) in the third quarter, according to FnGuide. The figure is higher than the record set in the third quarter of 2005.

If the current trend continues, the net profit of 18 banks in Korea for 2011 might reach 20 trillion won, breaking through the 15 trillion mark set in 2007.

The bigger profits, largely due to the easy adjustment of interest rates they charge for loans to households and corporations, could prompt criticism from the public, with the Korean economy struggling with slower growth and high inflation.

By Yang Sung-jin (insight@heraldcorp.com)