Banks Tightening Belts to Improve Profitability
By Na Jeong-ju
Staff Reporter
Banks are expected to tighten their belts next year to improve profitability amid intensifying competition with non-banking institutions and growing external risks from the U.S. subprime crisis, analysts said Monday.
Banks have recorded sharp earnings growth over the past couple of years on strong demand for loans, rises in commission fees and investment gains.
However, they are finding it increasingly difficult to boost their bottom line amid growing fund-raising costs and stiffer competition with non-banking financial institutions, analysts said.
The Korea Institute of Finance, a Seoul-based financial think tank, said the intensifying competition in the banking sector may prompt commercial lenders to lower their expectations for profits next year.
``The increasing rivalry between banks and stronger competition with non-banking firms will be reflected in banks' business results next year. It is time for them to focus on bolstering risk management,'' said Lee Byung-Yoon, a KIF research fellow.
Samsung Securities recently forecast the combined net profit of Kookmin, Shinhan and six other nationwide banks will fall to 5.7 trillion won in the second half, down 18 percent from 6.9 trillion won in the first half.
Banks saw their profitability worsen in the first half as more customers shifted their deposits from core deposit accounts to brokerage firms' stock investment accounts.
As a result, the average net interest margin of Korean banks, a key gauge of profitability, has fallen sharply. In addition, they have competed to raise interest rates on deposit products and cut lending rates to attract more customers, resulting in a fall in the gap between lending and deposit rates.
``Banks may face higher credit risks if economic uncertainties grow due to high oil prices and the won's appreciation against the dollar,'' a Bank of Korea (BOK) official said. ``This is the time for banks to strengthen their risk management capabilities and to improve the quality of their assets.''
If banks suffer an erosion of their core deposits, they have to attract funds from the money market. In that case, banks could pay higher costs in mobilizing funds. To protect their bottom line, they may move to raise borrowing rates, the BOK official said.
Banks are increasing loans to households and companies, while attracting less deposits, causing a surge in fund-raising costs and a drop in net interest margins, according to analysts.
This year, bank loans have grown at a faster pace than deposits, making it more difficult for lenders to secure enough funds for their surging loans.
They have issued more certificates of deposit and bonds to raise funds as more customers have withdrawn their money from bank accounts to invest in equities.