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‘Interest margins drive banks' earnings surprise’

The earnings surprise of major commercial banks in South Korea in the first quarter was partly driven by their improved net interest margins, data showed Monday.

The combined net profit of the four major commercial banks -- Shinhan Bank, Kookmin Bank, KEB Hana Bank and Woori Bank -- in the first quarter came to 2.28 trillion won ($2.01 billion), a 22.3 percent rise on-year, according to earnings reports by each bank last week. Excluding one-off profits, such as sell-offs of bank branches or loan obligations, the net profit of the combined four banks rose some 90 billion won.

The four banks’ revenues from interest have also jumped on-year. Kookmin Bank’s revenue climbed 11.8 percent to 1.26 trillion won from the previous year, while Shinhan Bank grossed 1.17 trillion won, with a 9.8 percent increase in revenue from interest. Woori Bank and KEB Hana bank also saw upticks by 1 percent and 4.1 percent in interest revenue, recording 1.14 trillion won and 1.13 trillion won, respectively. 

(Herald DB)
(Herald DB)
The improvement in NIM -- the difference between interest income and interest expenses, and a key barometer of a bank’s profitability -- at all four banks contributed to the jump in the revenues from interest while widening the gap in loan-deposit margins.

Although the prolonged low interest environment has pulled down interest for both loans and deposits, the US interest rate hike has pulled up market interest, consequently bringing up the lending rate and the NIM.

In the first quarter, the NIM for Kookmin Bank came to 1.66 percent, a 0.05 percentage point rise from the previous quarter, while that for Shinhan Bank reached 1.53 percent, up 0.04 percentage point. Woori Bank and KEB Hana Bank both saw 1.44 percent in NIMs, with a 0.07 percentage point and 0.06 percentage point rise from the previous quarter, respectively.

Experts note that the trend will continue, on the back of the anticipation of another Federal Reserve rate hike.

“With more Fed rate hikes expected, there is probability that interest rates at commercial banks are likely to follow suit and ride the growing upward trend,” said Kim Tae-hyun, a researcher from Kiwoom Securities. “The gap between the loan-deposit margin will continue to widen, as South Korea’s benchmark rate is likely to remain flat or take a downward turn at least once.”

The banks’ upbeat performance would also be a driving force, another expert said.

“The NIMs of banks in the first quarter reached way beyond expectations,” said Kim Jin-sang of HMC Investment Securities. “The upward trend of NIM is likely to continue, with the extended cash inflow into low-cost current accounts and (bank-friendly) environment in terms of the Fed rate hike.”

By Son Ji-hyoung (consnow@heraldcorp.com)
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