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43615
Sun, 02/01/2009 - 20:03
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(Yonhap Feature) Slowing economy makes big dent in Q4 bank earnings

By Kim Soo-yeon
SEOUL, Feb. 1 (Yonhap) -- South Korean banks' earnings probably plunged in the
fourth quarter as the slowing economy and a subsequent corporate restructuring
wave forced them to put aside more loan-loss reserves, analysts say.
To make matters worse, local banks are likely to suffer further setbacks this
year as the economy is widely expected to slip into the first recession in more
than a decade, hurt by plunging exports and flaccid domestic demand, they say.
According to local brokerages, top financial services company KB Financial Group
and other banks are projected to post a combined net profit of 550 billion won
(US$397.8 million) to 1.3 trillion won for the October-December period, down from
1.4 trillion won in the third quarter.
Shinhan Financial Group, whose flagship is Shinhan bank, and other banks are
slated to report their fourth-quarter earnings starting Monday.
"Without doubt, local banks' fourth-quarter bottom lines tumbled. The
restructuring of shipbuilders and construction firms prompted lenders to set
aside higher loan-loss reserves," said Choi Jong-won, a banking analyst at Tong
Yang Securities Co.
As part of a corporate restructuring drive, banks decided in mid-January to end
support to two ailing companies and reschedule debts at 11 builders and three
shipbuilders.
The financial watchdog estimated that due to the restructuring, local financial
firms, mostly banks, might have to put aside about 2.23 trillion won in
additional loan-loss reserves.
Analysts say domestic banks will likely face a bumpy road ahead because lending
growth is projected to slow down while net interest margin, a key gauge of
profitability, will come under pressure amid higher funding costs.
The government's call for active corporate restructuring is another burden on
banks' bottom lines, experts say. Domestic lenders are under pressure to
accelerate the process of weeding out their non-viable corporate clients as a
swift overhaul is deemed necessary to head off an economic crisis.
"Profit margins are forecast to be on the downward trend as funding costs shot up
in the process of raising capital adequacy ratio while the key interest rate has
fallen to a record low," said Lee Hyeok-jae, an analyst at IBK Securities Co. "It
is also inevitable that bad-debt expenses will increase amid the protracted
economic downturn."
Against such a backdrop, banks are increasingly wary of providing loans to
households and smaller firms as the economic slump and the credit crunch are
jacking up the amount of bad debt and loan default rates amid already-squeezed
profit margins.
"The Korean economy is entering a severe economic downturn. Although local banks
have recently increased their capital bases to buffer falling capital adequacy
ratios, the economic slump will raise more bad loans and loan loss reserves,"
said Lee at IBK Securities.
Korean lenders have been struggling to bolster their falling capital adequacy
ratios, a key barometer of financial soundness that measures the percentage of a
bank's capital to its risk-weighted credit.
The average capital adequacy ratio of 18 commercial and state banks came in at
10.86 percent as of the end of September, down 0.5 percentage point from three
months earlier. Late last year, commercial banks sold subordinated bonds and
hybrid debt to increase their capital base and the government is seeking to
launch a special fund to help them boost capital in the first quarter.
The loan default rate by small and medium enterprises (SMEs) came in at 1.7
percent as of end-December, up from 1.5 percent from the end of September,
raising the possibility that banks will tighten their grip on lending to
cash-strapped smaller firms.
Indeed, banks expect credit risks for SMEs to reach a 10-year high in the first
quarter, according to the Bank of Korea.
"The cooling economy is expected to shoot up credit risks of companies. The task
facing Korean banks for this year will be how to prevent the fallout of the
worsening real economy from denting their bottom line," said Han Jung-tae, an
analyst at Hana Daetoo Securities Co.
The South Korean economy, Asia's fourth-largest, shrank 5.6 percent last quarter
from three months earlier, the sharpest fall since the Asian financial crisis a
decade ago, due to faltering exports and sluggish domestic demand.
Many experts say economic growth will likely fall to the 1-percent range this
year with some expecting a recession for the first time in more than a decade.
sooyeon@yna.co.kr
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