Banks' Q1 net income jumps 28.7% as one-off Hong Kong-tied ELS costs fade

ATMs of major banks are installed in Seoul, May 5. Yonhap

Korean banks reported a combined net profit of 6.9 trillion won ($5 billion) in the first quarter of this year, marking a 28.7 percent increase from 5.3 trillion won a year earlier, according to the Financial Supervisory Service (FSS) on Friday.

The rise came despite a decline in interest income amid falling market interest rates, as the impact of one-off expenses — compensation for financial losses linked to equity-linked securities (ELS) tied to the performance of Hong Kong’s Hang Seng China Enterprises Index — faded compared to the same period last year.

In the first quarter of 2023, their net profit stood at about 7 trillion won but dropped to the 5 trillion won range in the first quarter of 2024 due to large-scale compensation payments following heavy losses linked to high-volatility Hong Kong-related ELS products amid deteriorating relations between the United States and China.

Data from the FSS showed that commercial and policy banks led the earnings rebound among domestic lenders in the first quarter of this year.

Commercial banks earned a total net profit of 3.8 trillion won, up 30.3 percent year-on-year, while policy banks posted a 39.7 percent increase to 2.7 trillion won over the same period.

Meanwhile, regional and internet-only banks underperformed, with net profits falling to 300 billion won and 200 billion won, respectively — a decline of 27.7 percent and 2.6 percent from a year earlier.

Profitability in the banking industry also showed signs of recovery. The return on assets rose by 0.13 percentage points to 0.71 percent, while the return on equity climbed 1.75 percentage points to 9.55 percent.

On the other hand, marketing and administrative expenses rose 6.3 percent year-on-year to 6.8 trillion won. Labor costs and material expenses also increased to 4.2 trillion won and 2.6 trillion won, respectively, compared to the previous year.

In particular, provision for loan losses rose 23.9 percent or 300 billion won, reaching 1.6 trillion won from the same period last year.

The financial watchdog attributed the rise mainly to an increase in provisioning amid growing concerns over credit losses, notably following Homeplus' recent filing for corporate rehabilitation.

Korea’s second-largest discount retailer filed with the Seoul Bankruptcy Court on March 4, following a downgrade of its short-term credit rating from A3 to A3-.

"Banks demonstrated robust net profits in the first quarter despite declining interest income and higher loan-loss provisions," an FSS official said. "We will ensure that banks maintain adequate loss-absorbing capacity so they can reliably perform their fundamental role as financial intermediaries amid persistent domestic and global uncertainties."