Hefty Q3 profits forecast for major banks

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By Anna J. Park

Major Korean banks are expected to log solid profits for the third quarter, due mainly to an increase in loans amid rising interest rates.

The rising interest rate trend is expected to benefit the bottom lines of domestic banks until next year, despite the government's strengthened regulations on lenders to curtail loans. The increase in loans could slow down during the fourth quarter due to government pressure, but the operating profit outlook for banks during the fourth quarter and next year remain rosy.

According to the latest statistics released by the Bank of Korea (BOK) earlier this week, the total amount of household loans extended by local banks at the end of September reached 1,050 trillion won ($890 billion), which is up more than 6.5 trillion won from a month earlier.

The total amount of household loans extended by banks during the third quarter rose more than 22 trillion won, which is nearly 10 percent higher than the 20.9 trillion won increase seen during the second quarter.

Due to the strengthened government control over household debt, the total amount of household loans is expected to decline in the fourth quarter. However, the increase in net interest margin (NIM) is also expected to continue to benefit banks' profitability.

The BOK is signaling that it is highly likely to raise its key interest rate once again in November, following its last hike in August. Given that the effects of August's interest rate hike will be felt during the fourth quarter, November's interest rate decision will have a positive impact on banks next year.

Yuanta Securities Korea forecast that local banks' NIM will rise until the second quarter of next year, following the BOK's additional interest rate hike in November and another one sometime early next year.

Shinhan Financial Investment also came out with a similar forecast, saying it expects the NIM to continue rising until the first quarter of next year thanks to the central bank's interest rate hike.

Policy directions surrounding local banks are also considered to be favorable, given that pressure from financial authorities on banks' dividend payments was absent during the second quarter.