Provisions weigh down on banks’ bottom line

By Kang Seung-woo

Despite rising earnings in the first three quarters, banks are still plagued by an increase in bad-debt provisions due to the sluggish housing market and corporate debt restructuring, the nation’s financial watchdog said Monday.

The Financial Supervisory Service (FSS) said in a report that the combined provision for bad debt of 18 lenders was tallied at 11.6 trillion won ($10.32 billion) in the January-to-September period, compared with 9.5 trillion won a year earlier. It represents an increase of 21.9 percent.

In the third quarter, the provision slightly dipped by 2.2 trillion won to 3.4 trillion won from the second quarter.

The FSS said that costs to cover potential losses from loans extended to property developers and large corporate borrowers were attributed to the increase.

“It’s difficult to expect that banks’ profits will increase steeply this year as lenders are aggressively bracing for an increase in legal provisions for bad debts amid a sluggish property market and massive corporate debt restructuring,” an official of the FSS said.

Meanwhile, the financial institutions’ earnings advanced 34.2 percent during the cited period, compared with a year ago, riding on the strength of increased income from interest and investments.

They posted 7.3 trillion won in combined net earnings through September, up from 5.5 trillion won the previous year, according to the FSS.

However, this year’s bank earnings failed to match those recorded before the global financial crisis in 2007, when the overall amount stood at 13.1 trillion won. In 2008, the earnings declined to 8.2 trillion won.

Interest income, a key source of banks’ earnings, reached 27.8 trillion won, up 21.3 percent from a year earlier, while the net interest margin (NIM), a barometer of profitability, rose by 0.43 percentage points to 2.3 percent. Provisions are deducted, when banks’ earnings are calculated.

According to the FSS, the improved earnings came after widened loan-deposit spreads helped improve banks’ profits, while bullish stock trading also pushed up earnings from sales of their stock holdings.

“Although banks have made profits in net income, the increase in provision for bad debt has prevented them from bouncing back to the pre-crisis level. In addition, their earnings structure is not stable, as revenue from sales of their stock holdings is representing a large portion of it,” the official said.

The group of 18 banks are Korea Development Bank, the National Agricultural Cooperative Federation, the Export-Import Bank of Korea, the National Federation of Fisheries Cooperatives, Hana Bank, Shinhan Bank, Woori Bank, Korea Exchange Bank (KEB), Kookmin Bank, SC First Bank, Citibank Korea, Daegu Bank, Busan Bank, Kyongnam Bank, Kwangju Bank, Jeonbuk Bank and Jeju Bank.