Banks in Risk Control Mode
By Na Jeong-ju
Staff Reporter
Banks are tightening their belts to improve profitability amid growing uncertainty about their earnings prospects, moving to close branches and cut loans.
Kookmin Bank and other commercial lenders have refrained from issuing more loans this year to maintain their financial soundness and put more emphasis on risk management.
The efforts reflect concerns that the fallout from excess lending competition among commercial banks could strike a severe blow to the banking industry over the coming months.
Shinhan Bank, the country's second largest lender, plans to combine about 20 branches this year, and cut loans to households and construction businesses.
The Industrial Bank of Korea, a state-run bank, said it will close up to 40 branches nationwide in the third quarter. Woori Bank, the third largest lender, has also decided to set up the risk management department to more effectively manage potential default risks.
Shinhan Financial Group has recently decided to dismiss up to 300 senior employees to ensure more labor flexibility.
The dismissal is a part of restructuring programs that will continue throughout this year in the country's third largest financial services provider. Shinhan officials said the group has begun diverse programs to streamline the organization, which is suffering growing labor costs since its merger with Chohung Bank in April last year.
When Shinhan acquired Chohung last year, it promised to take over the entire staff without any dismissals. The pledge was necessary to get nod from unions for the takeover, but has created a lot of problems in improving its productivity. The group's merger with LG Card, the country's top credit card company, is also weighing on its labor costs.
The group's per-employee income is much lower than its rivals. Shin Sang-hoon, president of Shinhan Bank, the group's keystone subsidiary, earlier stressed the need for post-merger restructuring, saying the bank is showing weaker-than-expected results after the merger with Chohung.
The Korea Institute of Finance said the intensifying competition in the banking sector may prompt commercial lenders to cut their profit margins as the battle for customers heated up.
``The negative impact of the competition will reflect in their business results this year. They should bolster their risk management," said Lee Byung-Yoon, a research fellow of the Korea Institute of Finance.
The Korea Federation of Banks said lenders are taking a series of measures to improve the quality of their assets and their risk management skills in line with tougher capital requirements set by the Bank for International Settlements (BIS).
Under the new framework for capital adequacy of banks, lenders are obliged to raise their loan-loss reserves to be better prepared for potential risks, and to spend more on enhancing related systems. Banks hope the new capital rules will help them reflect their own credit, market and operational risks more accurately.