By Lee Hyo-sik
Staff Reporter
Domestic lenders have enjoyed record earnings over the last couple of years. But these days things are not as easy as before. They are facing escalating competition between themselves and non-banking financial firms, watching their bottom lines being undercut by weakening profit margins.
Banks have raised interest rates on deposit products and cut lending rates to attract more customers as a growing number of depositors take money out of bank accounts to put into brokerage firms' stock investment accounts for higher returns. People have also withdrawn money from banks to invest in stocks at home and abroad to capitalize on bullish market runs.
To make up for shortfalls in savings deposits and raise funds for extending loans, banks have recently issued more bonds and certificates of deposits (CDs), further eating into their profitability.
Analysts say banks' business conditions will continue to worsen in the coming months, suggesting that lenders make more efforts to enter securities and other non-banking sectors, and expand their presence abroad to find new sources of earnings and future growth engines.
Major banks' performance worsened in the third quarter with their net interest margin (NIM) falling on losses stemming from their exposure to U.S. subprime mortgages and rising costs of fund raising. The NIM is the gap between the lending and deposit rates after the reflection of all costs.
Lenders used to attract funds through low-interest core deposits and extended loans to households and businesses at higher rates, generating easy profits. But the average NIM of Korean banks has dropped sharply as they have competed to raise interest rates on deposit products.
Shinhan Bank posted 316 billion won in net profits in the July-September period, down 55.5 percent from the previous quarter, while Woori Bank saw its net profit decline 54 percent to 244 billion won because of losses on its investment in securities backed by U.S. high-risk housing loans.
Also, third-quarter net profits of the Industrial Bank of Korea (IBK) and the Korea Exchange Bank fell 32 percent to 218 billion won and 30 percent to 194 billion won from the second quarter, respectively.
The country's largest retail lender Kookmin Bank saw its profits decrease 2.8 percent to 2.26 trillion won in the first nine months of the year as its NIM fell on rising deposit rates and falling lending rates.
The lender's NIM stood at 3.27 percent in the third quarter, down from 3.54 percent in the second quarter and 3.6 percent in the first quarter. Woori Bank's NIM fell to 2.37 percent from 2.49 percent in the January-March period, while Shinhan Bank saw its NIM decrease to 2.25 percent from 2.28 percent over the same period.
Banks' non-performing loans (NPLs) have also increased, further deteriorating their bottom lines. The IBK saw its NPLs reach 0.91 percent of its entire loans as of the end of September, up from 0.58 percent three months earlier. Hana Bank's NPLs rose to 0.8 percent from 0.75 percent.
Gu Bon-sung, a researcher at the Korea Institute of Finance (KIF), said local lenders were widely expected to record lower profits in the third quarter, down from an all-time high in the first half of the year. ``Banks will continue to struggle in the coming months as mortgages and other loan markets have reached saturation point. Also, the shift of funds from the banking sector to securities companies will likely accelerate as the Capital Market Integration Act takes effect in 2009, further weakening banks' bottom line.''
He said lenders should advance into non-banking businesses and explore opportunities overseas to find new sources of income and nurture future growth engines.
``Rather than relying on easy NIM profits, banks should strive to develop new financial products to attract customers and compete with brokerage firms in the emerging wealth management market,'' Gu noted.