Korean banks log first quarterly loss in 8 years

SEOUL, Feb. 3 (Yonhap) -- South Korean banks lost money last quarter for the
first time in eight years due to increased loan-loss reserves, with full-year
earnings also tumbling nearly 48 percent, the financial watchdog said Tuesday.
Total losses of 18 commercial and state-run lenders reached 300 billion won
(US$215.4 million) in the October-December period, compared with a 1.9 trillion
won profit a year earlier and 1.5 trillion won three months earlier, according to
a preliminary estimate by the Financial Supervisory Service (FSS).
It was the first quarterly loss since the fourth quarter of 2000 when their
losses reached 4.6 trillion won. For all of 2008, their combined earnings
plummeted 47.4 percent on-year to 7.9 trillion won, the watchdog said.
"Hit by the global economic slump, bad loans increased in the fourth quarter.
Given the fast cooling economy, local banks' earnings outlook for the current
quarter seems to be gloomy," Joo Jae-seong, assistant governor at the watchdog's
the banking service division, told a press conference.
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.
According to the FSS, local lenders set aside 1 trillion won in loan-loss
reserves in the fourth quarter to brace for the revamp of shipbuilders and
construction firms. For the whole year, local banks' loan-loss reserves amounted
to 9.9 trillion won, up 121.3 percent from a year earlier.
Their net interest margin (NIM), a key barometer of profitability, reached 2.29
percent in 2008, down from 2.44 percent the previous year, the watchdog said.
Banks' NIM came in at 2.39 percent in the fourth quarter.
"Given falling yields of certificates of deposit (CDs), banks' NIM is not likely
to improve in the first quarter," Joo said. Local lenders raise short-term funds
by selling CDs and bank bonds.
Profit margins are widely forecast to see a downward trend as funding costs shot
up in the process of raising capital adequacy ratios, while the key interest rate
has fallen to a record low. The Bank of Korea, the country's central bank, has
cut the policy rate by 2.75 percentage points to an all-time low of 2.5 percent
since October.
South Korean lenders have been struggling to boost their falling capital adequacy
ratios, a key barometer of financial soundness, as the slumping economy and the
credit crunch are increasing the amount of bad loans.
The government is seeking to launch a special fund worth 20 trillion won in the
first quarter to help local banks raise their capital base. The fund will be used
to buy subordinated bonds and hybrid debt from lenders.
According to financial sources, six or seven commercial banks, including No. 3
lender Woori Bank, are likely to tap the fund to raise an estimated 5 trillion
won in capital.
Although banks can tap the fund on a voluntary basis, they are wary of using it
due to fears it may tarnish their credibility.
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.
sooyeon@yna.co.kr
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