Banks Suffer From Falling Productivity
By Kim Jae-kyoung
Staff Reporter
Local banks are facing the double burden of falling profitability and rising labor costs in the wake of snowballing loan-loss reserves triggered by the global financial crisis.
According to industry sources and data from banks, eight major lenders ― Kookmin, Shinhan, Woori, Hana, Korea Exchange Bank (KEB), the Industrial Bank of Korea (IBK), SC First and Citibank Korea ― saw their per capita net profit fall considerably last year.
Per capita net profit, an indicator of profitability, is determined by dividing total net profit by the number of employees.
By bank, per capita net profit for Kookmin, the nation's largest lender, fell by 29 percent to 68.6 million won in 2008 from 97 million won in 2006.
During the same period, Woori saw its per capita income plunge by 77 percent to 25.2 million won from 112 million won as the lender had to set aside a huge amount of reserves for losses stemming from its investment in overseas collateral debt obligations (CDO) and credit default swaps (CDS).
Hana also saw its per capita profit halved to 54.5 million won from 113 million won, while the comparable figure for Shinhan and KEB stood at 145 million won and 148 million won, respectively, similar to the levels recorded in 2006.
On the other hand, banks' labor costs have continued on an upward trend over the past two years.
The per capita cost for Kookmin and Woori reached 85.8 million won and 77.5 million won in 2008, respectively, up 36 percent and 38 percent from 2006. Only Hana saw its costs fall to 61 million won from 63 million won.
As a result, only four out of the eight banks ― Shinhan, KEB, IBK and Citibank Korea ― saw their per capita profit stay above the commensurate cost in 2008, which is in stark contrast to the fact that back in 2006, all the eight lenders' income exceeded costs.
``Local banks' profitability deteriorated last year as they set aside a large amount of loan loss reserves and shored up their capital bases, which reduced their productivity considerably,'' a local bank executive said.
The problem is that things are unlikely to turn around anytime soon due to narrowing net interest margin and rising write-offs.
Banks' profits are expected to fall further after they wrote off bad debts worth 3.34 trillion won in the first quarter, up 205.9 percent from the previous year, according to a report by Prudential Securities.
The report forecast that local banks' net profit would reach around 453.1 billion won between January and March, down 83.7 percent from the previous year.
``Bank performances are likely to turn around in the third quarter of this year but it will take time to get back on a full recovery track,'' Prudential analyst Sung Byung-soon said.
``Unless risks associated with overdue loans are cleared away, it is unlikely that banks will enjoy large profits this year,'' he added.