'Banks should take greater risks'

By Lee Kyung-min

Korean banks should work harder to improve their financial health by reducing their heavy reliance on interest income, industry analysts said Sunday.

Balance sheet increases must be managed by identifying diversified sources of profit or high value-oriented sustainable future growth will become more elusive, they said.

“The heavy reliance of Korean banks on interest income has long been criticized because it is the easiest way for them to make money,” said an analyst who declined to be named.

“Collecting the difference between the lending rate and deposit rate is a guaranteed way to generate income, especially since the central bank raised the key base rate late last year.”

The criticism followed data from the Financial Supervisory Service (FSS) that showed the interest income of banks nationwide in the October-December period was 10.5 trillion won ($9.2 billion), the highest quarterly figure since 2008 when financial authorities began compiling the data.

The banks' average lending rate rose 0.36 percentage points in 2018 from 2016, while their deposit rate rose only 0.24 percentage points.

The widened gap between the two rates means more interest income for the banks.

No major painstaking business expansion efforts are required in the process, a reason banks are reluctant to develop financial products contributing to fee-based businesses including mergers and acquisitions (M&As) or other means to diversify their business portfolios, the analyst said.

This is a reason Korean banks are falling far behind their global peers in terms of sound financial management.

“Global banks put much emphasis on return on assets (ROA), an indicator of how profitable a company is relative to its total assets,” the analyst said. “The figure for most Korean banks will be smaller than 1 percent, a number that is rather concerning by global standards.”

An ROA of 2 percent is considered appropriate among global banks.

The number indicates that while Korean banks have large balance sheets, mostly due to an increase in loans, their “healthy” profit is not as high as it should be, the analyst said.

“The volume of loans is considered an asset on paper, but whether the large numbers translate into profit is a whole different question,” she said.

An economist commented that while Korean banks do engage in M&As and foreign exchange market business, a more sophisticated form of financial business mostly pursued by large investment banks (IBs), they have largely relied on lending, especially household lending, the easiest and most convenient way on the back of the property market boom over past years.

“Household lending concerns mortgage and other income, while corporate lending requires a more stringent screening process, including future prospect assessment,” he said. “Household lending poses lower risk given their loan-to-value is not as high as their corporate lenders.”

Given the overheated property market shows signs of cooling following the government's stricter lending rules, banks' interest income derived from household lending will decrease, he said.

The criticism is in line with the Korea Center for International Finance's (KCIF) analysis of reports released by several investment powerhouses in February.

The investment banks said Korea's top five banks -- Shinhan, KB Kookmin, KEB Hana, Woori and NongHyup -- should strengthen nonbanking sectors through M&As while expanding overseas businesses, thereby reducing reliance on interest income.

The recommendation was in response to Korean banks' weak performance in such sectors.

Only 23.7 percent of income came from nonbanking sectors for Korean banks, the report said, while the comparable figure for Japan was 54.2 percent, followed by the U.S. (53.9 percent) and the U.K. (50.9 percent).

The concern was highlighted by the top five's record-high net income of 9.7 trillion won in 2018, a 21 percent increase from 8.4 trillion won a year earlier.

Most of the income, however, came from a 2.8 trillion won increase in their interest income, which rose 10.5 percent from a year earlier.

“Business portfolio diversification to identify new sources of profit mostly through M&As and strengthening nonbanking sectors are crucial for banks to weather adverse conditions in the months to come,” the economist said.