By Kim Jae-kyoung
Staff Reporter
Korea's major financial groups and their banks are facing their biggest challenge since the 1997-1998 financial crisis, with their profitability and soundness rapidly getting worse amid the deepening liquidity crunch.
What is of more concern is that things are unlikely to turn around in the near future, as bank assets run a high risk of going sour with a deeper economic downturn expected to affect loans held by households and smaller companies.
Against this backdrop, at a weekly staff meeting Monday, Financial Services Commission Chairman Jun Kwang-woo said, ``The regulatory body will focus on strengthening the financial soundness of banks to forestall recession in November.''
Hana Financial Group has fallen as the biggest victim to the financial turmoil, suffering a loss in the third quarter for the first time in eight years.
The financial group said Friday that it posted a net loss of 73.3 billion won between July and September as Hana Bank, the flagship firm of the group, had to put aside 250.7 billion won in loan loss reserves associated with Taesan LCD. As a result, Hana Bank recorded a net loss of 71.1 billion won
The group's net interest margin (NIM), the gap between deposit and lending interest rates, decreased to 2.05 percent from 2.27 percent a year ago, while its non-performing loan (NPL) ratio jumped to 0.95 percent from 0.8 percent.
Its return on assets (ROA) and return on equity (ROE), two key barometers of profitability, also plunged to 0.45 percent and 7.81 percent, respectively, from 1.04 percent and 15.63 percent a year earlier.
In its latest report, Prudential Securities forecast Hana will see a further decline in profitability, citing risks associated with foreign exchange and economic downturn.
KB Financial Group registered a net income of 553.3 billion won in the third quarter, down 28.6 percent from 774.9 billion won a year before and 14.12 percent from the previous quarter's 644.4 billion won.
The poor performance came as its flagship firm Kookmin Bank, the largest lender in Korea, saw its net profit dip by 36.36 percent to 563.1 billion won from the prior year's 884.9 billion won.
The group said that the bank had to set aside 341.8 billion won in loan-loss provision compared with the second quarter's 236.4 billion won due to a rise in NPLs and overdue rates.
The lender's Bank for International Settlement (BIS) ratio also fell below the benchmark 10 percent, posting 9.76 percent. Its NIM also decreased to 2.98 percent from 3.48 percent a year ago.
Shinhan Financial Group announced Friday that its third-quarter earnings fell 38.3 percent year-on-year to 323.3 billion won ($254.6 million) in the July-September period, compared with 524.2 billion won a year earlier.
Shinhan Bank logged a net profit of 214.3 billion won in the third quarter, down 32.2 percent from a year earlier. The bank's NIM rose to 2.1 percent in the July-September period from 2.03 percent three months earlier.
The disappointing performance by the financial groups came as local banks suffered worsening profitability and soundness.
Choi Young-sang, president and chairman of AT Kearney, a global consulting firm, said that even without the global financial crisis, local lenders' poor performance was highly expected.
``Banks' loan-loss reserves have been growing and the NIM has been narrowing, suggesting that banks' fundamentals have been weakening,'' he said.
``Although the current liquidity shortage will not lead to a financial crisis here, the turmoil will have a huge impact on the future performance of Korean lenders,'' he added.
Market analysts said that heavy debt burden coupled with deepening economic downturn will put further strain on local banks going forward.
They added that once the economy slips into a recession, banks would suffer a new set of credit losses in areas such as consumer and commercial property loans.
``The banks' poor performance will likely get worse before it gets better in line with an accelerating economic slowdown,'' Prudential Securities analyst Sung Byung-soo said
``Local lenders will not get back on track until 2010 as they are exposed to rising default risk of loans extended to households and smaller companies,'' he added. ``These are well reflected in the collapse of local financial stocks.''
Although they have become less volatile following the won-dollar swap agreement last Thursday, stocks for financial holding firms took precipitous falls over the past four months.
Hana stocks plunged 50.31 percent to 20,000 won per share at the end of October from the end of July, the biggest fall among local financial holding firms. Shinhan dropped by 33.82 percent to 31,300 won during the same period. KB shares, which debuted on the main bourse Sept. 29, fell by 21.95 percent to 32,000 won last Friday.
In the meantime, Woori Financial Group is scheduled to unveil its third-quarter earnings result this Friday.