By Choi Sung-jin
Commercial banks in most countries are struggling to reverse plunging earnings amid the global trend of ultra-low interest rates. Korean banks are exceptions.
The nation's benchmark interest rate has also fallen to a record low of 1.25 percent but the domestic banks' interest earnings -- produced from the difference between deposit and lending rates -- are increasing, regulators said Tuesday.
According to the Financial Supervisory Service, the interest income of domestic banks in the second quarter of this year totaled 8.5 trillion won ($7.6 billion), up 200 billion won from a year ago. The increase is rather unexpected given the Bank of Korea reduced its key interest rate by 0.5 of a percentage point from 1.75 percent over the period.
Normally, the drop in the policy rate and consequent fall in the market rate result in the worsening of banks' performance because of dwindling loan-deposit margins, financial market watchers said.
In the case of Japan, which introduced a negative interest rate in February, major banks' bottom lines have fallen headfirst. The big-three Japanese banks -- Mitsubishi, Mizuho and Mitsui-Sumitomo -- saw their net income in the second quarter plummet 32 percent, 16 percent and 31.2 percent, respectively, from a year earlier.
Morgan Stanley said if the European Central Bank (ECB) lowers the deposit rate paid for excess reserves the banks deposit at the ECB by 0.1 of a percentage point, the 20 largest European banks' net interest income would plunge by an estimated 2.8 billion euro (about 3.46 trillion won) in 2017.
That Korean banks' interest earnings have increased amid the falling interest rate indicates they reduced deposit rates in keeping with the drop in commercial rates but did not do the same with lending rates, the money market observers said.
Also on an upward curve is their net interest margin (NIM), an indicator of the banks' profitability. NIM fell 0.56 of a percentage point, from 2.11 percent at the end of 2012, when the benchmark interest rate began to fall, to 1.55 percent in the first quarter of this year, but rose 0.01 of a percentage point to 1.56 percent in the second quarter.
NIM, often regarded as a more correct indicator of the banks' profitability than the loan-deposit margin, is a percentage of what a financial institution earns in a given period on loans and other assets, minus the interest paid on borrowed funds, divided by the average amount of the assets.
The rise in NIM is due to the domestic banks' business tactics, by which they have increased mortgage loans and project financing that can bring stable interest income in the long term while expanding the portion of short-term savings instruments, including demand deposits, applying ultra-low interest rates. In short, these banks are extending the duration of assets (loans) while curtailing debt (deposit) durations. The gap between the two now stands at an average of 0.15 years, up 0.03 years from 0.12 years at the end of last year.
Also behind the Korean banks' relatively excellent performances compared with their foreign counterparts are some tricks: most commercial banks here received funds at low interest rates to lend to small and midsize enterprises but lent the money at high rates, and sometimes, to other borrowers, garnering hefty interest income.
According to Bank of Korea data submitted to Rep. Lee Eon-ju of the opposition Minjoo Party of Korea, only three out of 12 commercial banks headquartered in Seoul and provincial cities met the obligatory portion of lending to SMEs in the first eight months of this year.
"The central bank sharply increased the funds given to commercial banks to help ease cash shortages of small businesses, from 9 trillion won in 2012 to 25 trillion won this year, and lowered its lending rate from 1.25 percent to 0.75 percent," Rep. Lee said. "Most of these commercial banks, however, did not keep the compulsory portion of lending to SMEs and lent the money at far higher interest rates than the BOK set, receiving up to 3 percent more of interest from them."
Commercial banks in most countries are struggling to reverse plunging earnings amid the global trend of ultra-low interest rates. Korean banks are exceptions.
The nation's benchmark interest rate has also fallen to a record low of 1.25 percent but the domestic banks' interest earnings -- produced from the difference between deposit and lending rates -- are increasing, regulators said Tuesday.
According to the Financial Supervisory Service, the interest income of domestic banks in the second quarter of this year totaled 8.5 trillion won ($7.6 billion), up 200 billion won from a year ago. The increase is rather unexpected given the Bank of Korea reduced its key interest rate by 0.5 of a percentage point from 1.75 percent over the period.
Normally, the drop in the policy rate and consequent fall in the market rate result in the worsening of banks' performance because of dwindling loan-deposit margins, financial market watchers said.
In the case of Japan, which introduced a negative interest rate in February, major banks' bottom lines have fallen headfirst. The big-three Japanese banks -- Mitsubishi, Mizuho and Mitsui-Sumitomo -- saw their net income in the second quarter plummet 32 percent, 16 percent and 31.2 percent, respectively, from a year earlier.
Morgan Stanley said if the European Central Bank (ECB) lowers the deposit rate paid for excess reserves the banks deposit at the ECB by 0.1 of a percentage point, the 20 largest European banks' net interest income would plunge by an estimated 2.8 billion euro (about 3.46 trillion won) in 2017.
That Korean banks' interest earnings have increased amid the falling interest rate indicates they reduced deposit rates in keeping with the drop in commercial rates but did not do the same with lending rates, the money market observers said.
Also on an upward curve is their net interest margin (NIM), an indicator of the banks' profitability. NIM fell 0.56 of a percentage point, from 2.11 percent at the end of 2012, when the benchmark interest rate began to fall, to 1.55 percent in the first quarter of this year, but rose 0.01 of a percentage point to 1.56 percent in the second quarter.
NIM, often regarded as a more correct indicator of the banks' profitability than the loan-deposit margin, is a percentage of what a financial institution earns in a given period on loans and other assets, minus the interest paid on borrowed funds, divided by the average amount of the assets.
The rise in NIM is due to the domestic banks' business tactics, by which they have increased mortgage loans and project financing that can bring stable interest income in the long term while expanding the portion of short-term savings instruments, including demand deposits, applying ultra-low interest rates. In short, these banks are extending the duration of assets (loans) while curtailing debt (deposit) durations. The gap between the two now stands at an average of 0.15 years, up 0.03 years from 0.12 years at the end of last year.
Also behind the Korean banks' relatively excellent performances compared with their foreign counterparts are some tricks: most commercial banks here received funds at low interest rates to lend to small and midsize enterprises but lent the money at high rates, and sometimes, to other borrowers, garnering hefty interest income.
According to Bank of Korea data submitted to Rep. Lee Eon-ju of the opposition Minjoo Party of Korea, only three out of 12 commercial banks headquartered in Seoul and provincial cities met the obligatory portion of lending to SMEs in the first eight months of this year.
"The central bank sharply increased the funds given to commercial banks to help ease cash shortages of small businesses, from 9 trillion won in 2012 to 25 trillion won this year, and lowered its lending rate from 1.25 percent to 0.75 percent," Rep. Lee said. "Most of these commercial banks, however, did not keep the compulsory portion of lending to SMEs and lent the money at far higher interest rates than the BOK set, receiving up to 3 percent more of interest from them."
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