Banks' net interest income drops in 2Q

Shinhan Financial Group Chairman Cho Yong-byoung

By Lee Kyung-min

The net interest income of Korea's major commercial banks shrank in the second quarter, posing a risk to the record-breaking profits seen by their holding companies in the same period, data showed Sunday.

Interest-based income ― traditionally the easiest way for banks to make money ― is likely to face further setbacks in the coming months as central banks in Korea and the U.S. are set to implement more “accommodative” monetary policies ― meaning key rate cuts.

Adding to the bleaker prospect is strengthened lending rules over the past few months, overseen by the Financial Services Commission (FSC) to curb the overheated housing market.

Korea's four leading banks ― Shinhan, KB Kookmin, KEB Hana and Woori ― saw their net interest margin (NIM) drop in the April-June period from the previous three months.

NIM, the difference between the rate a bank receives from loans and what it pays for deposits, is considered a measure of profitability.

Shinhan's NIM stood at 1.58 percent in the second quarter, a 0.03 percentage points drop from the first quarter.

Both KEB Hana and KB Kookmin saw their figures drop 0.01 percentage point when the former's figure slid to 1.54 percent while the latter's figure dropped to 1.7 percent.

Woori's figure dropped to 1.49 percent from 1.52 percent.

The weak second quarter NIM performance poses a “substantial risk” to the record-breaking profits of their holding companies, all of which rely heavily on interest-based income from asset-backed loans and services charges.

According to their regulatory filings, Shinhan posted a 996.1 billion won ($841 million) net profit in the second quarter, up 8.5 percent from the quarter before.

KB's quarterly net profit was 991.1 billion won, a 17.2 percent increase.

Hana posted 658.4 billion won and Woori 610.3 billion won, a 20.6 percent and 7.3 percent jump, respectively.

However, such a handsome performance may see a major roadblock as the Bank of Korea is highly likely to lower its key interest rate in the latter half of the year, following the U.S. Federal Reserve's notable dovish turn.

A lowered key rate means lowered market rates on loans, which leads to lower profitability for commercial banks.

Meanwhile, a heavy reliance on interest-based income has long been cited as a key problem Korean banks have to overcome.

According to an analysis from the Korea Center for International Finance (KCIF) published in March on reports from global investment powerhouses, Korea's major banks should strengthen their non-banking business to boost profits in the long term.

The report said Korea should “seek mergers and acquisitions,” an uncomfortable recommendation, for a riskier and bolder move to diversify earnings amid increasingly muted benefits from interest rates due to the macroeconomic slowdown.