Banks' profit outlook grim in Korea

Korean banks' capacity to generate profits is getting worse due to the economic slowdown and squeezed profit margins, raising the need to diversify their profit sources, a report showed Sunday.

Local banks' room to make more profit has been reduced as the economic outlook is grim and credit risks held by borrowers remain high, Lee Byung-yoon, a senior research fellow at the Korea Institute of Finance, said in the report.

"Korean banks' sustained falls in net interest margin (NIM) are making it difficult for them to earn interest income more and more, raising the need to diversify profit sources," he added. NIM is a gauge of a bank's profitability.

Local banks' combined net income amounted to 5.5 trillion won ($4.85 billion) in the first half, almost halving from 10 trillion won the previous year, according to data by the Financial Supervisory Service (FSS).

The report said a fall in the first-half income mainly came as one-off profits like stake sales were missing this year, but it also resulted from a decline in total profits against banks' assets.

Local banks' NIM came in at 2.13 percent in the second quarter, from 2.18 percent three months earlier, according to the FSS.

Local banks' NIM has been on the decline as market interest rates have fallen on prospects for a rate cut by the central bank. Korean banks mostly generate profits from interest income, which accounts for around 86.5 percent of their total profits.

Local banks are facing challenges as the economy is losing steam, raising credit risks for households and companies and increasing the need to put aside more loan-loss reserves.

Asia's fourth-largest economy is widely expected to grow at the 2-percent range this year due to faltering exports and sluggish domestic demand. (Yonhap)