By Yoon Ja-young
Staff Reporter
Banks are suffering falling profitability following fierce competition to increase their bulk. Specifically, Hana Bank is poor in overall profitability measures due to the low margin strategy focusing on expansion.
According to the Financial Supervisory Service (FSS), the return on assets (ROA) of banks in the first half this year averaged 0.9 percent, falling 0.62 percentage points from a year ago. This has been falling each year since 2005, when it stood at 1.27 percent.
Their return on equity (ROE), another yardstick on profitability, stood at 12.66 percent, losing 7.51 percentage points from the previous year. The falls are notable even when taking into account that banks got an extraordinary profit of 2.9 trillion won last year from selling stakes in LG Card.
Their net interest margin (NIM) also reflected worsening profitability. The measurement of the difference between the interest income generated by banks and the amount of interest paid on their borrowing recorded 2.28 percent, down 0.2 percentage points from a year ago.
Behind the falling profitability are excessive competition to give loans. Due to the drop in savings, banks are also resorting to expensive means to raise money such as issuing CDs and bonds. They raised 27.8 percent of their money through these, up 2.7 percentage points from last year. Banks are also heavily promoting high interest rate savings to compete with CMAs of securities firms and mutual savings banks that offer higher interest rates.
Hana Bank was especially poor in the profitability measurements. It recorded 2.16 percent in NIM, the second lowest among five major banks following Shinhan. Shinhan's NIM, however, was much higher than others when incorporating its credit card business.
``Hana's valuation is bad due to poor profitability. It has been focusing too much on low-margin strategies to increase its bulk,'' a bank analyst said. Its ROE recorded 13.49 percent, and ROA stood at 0.81 percent.
The sluggish stock market this year made banks profitability worsen. Income related to equities totaled 800 billion won, nose-diving from 6.1 trillion won the previous year.
``Banks areadvised to avoid competition focusing on expanding bulk. They should diversify their income and enhance effectiveness, to build up stable, long-term growth,'' said a spokesperson at the FSS.
Mirae Asset analysts Andy Lee estimated the loan growth rate to slow down to 3 to 4 percent in the second half, due to the government's determination to curb liquidity following policy shifts to combat inflation.
``Banks also need to sustain NIM and focus on financial soundness, to survive the slowdown of the economy in the second half.''
He said banks must make efforts to diversify money-raising channels. Kookmin Bank and Shinhan Bank, for example, issued residential mortgage-backed securities (RMBS), which are cheaper than CDs.
Lee said financial stability will worsen, but at a tolerable degree. ``The credit quality of bank customers has improved greatly after the credit card bubble, due to polarization,'' Lee said, citing customers with poor credit have no access to banks.
He said the bank shares' valuation reflects too much concern on credit risks. Nevertheless, the concern over their financial soundness is likely to continue for the year.
chizpizza@koreatimes.co.kr