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| Analysts believe bank profitability could deteriorate. / Korea Times file |
By Kim Bo-eun
Financial firms, particularly banks, are facing increasingly tougher conditions amid low interest rates and falling investor sentiment.
Analysts said profitability is expected to deteriorate due to a mixture of falling net interest margins and sluggish corporate demand for loans.
Banks have been trying to offer more loans but there is less demand because companies have been reluctant to invest amid the economic slowdown at home and abroad.
Figures show the value of loans the five major banks provided to conglomerates fell to 73.74 trillion won in July from 76.59 trillion won in February.
What is of more concern is that the situation is likely to worsen as worries grow over the possibility of a prolonged slump based on a vicious cycle of less investment, fewer jobs, decreasing income and shrinking consumption.
An additional rate cut is likely to weigh further on banks in the coming quarters.
Expectations are growing that the Bank of Korea will lower its key rate as early as next month amid falling consumer prices and deteriorating external conditions, including trade feuds. It slashed its key interest rate by 25 basis points to 1.5 percent in July.
For banks, this would mean interest rates for loans and deposits will fall, leading to decreasing interest earnings.
The banks' net interest margins have already fallen. Those of Shinhan, Kookmin, Woori and Hana ranged between 1.49 percent and 1.7 percent in the second quarter, compared with 1.52 percent to 1.71 percent in the first quarter.
The net interest margin, considered a measure of profitability, is the difference between what a bank receives from loans and what it pays for deposits.
The loan-deposit ratio of the major commercial banks is nearing 100 percent. The figure for Shinhan is 97 percent, KB Kookmin 97.7 percent, Woori 96.9 percent and KEB Hana 97.3 percent.
If the ratio exceeds 100 percent, financial authorities regulate banks' lending.
"The lowering of interest rates will lead to falling net interest margins, which will affect overall profits," a bank official said. "The fall in loan assets can also deteriorate profits."
Another bank official said: "Demand for loans can fall amid a downturn but what is more worrying is the emergence of marginal businesses that lead to workouts or shutdowns."





































