South Korean banks and financial holding companies have entered emergency mode following the Bank of Korea's decision to cut the key rate by half a percentage point on March 16.
In general, a 0.25 percentage point cut in benchmark rate means an annual net profit decline of 200 billion won to 300 billion won for South Korean banks. In other words, they are currently facing a net profit loss of approximately 500 billion won.
The benchmark rate was lowered twice last year, accelerating a decline in their net interest margin. According to IBK Securities, the net interest margin is likely to fall by at least four basis points in the first quarter of this year due to the spread of COVID-19 and the recent key rate cut. Some point out that the decline will reach six basis points with the interest rate close to zero.
The problem is that the banks have no means to counter the situation. Strict housing loan regulations are already in effect and the profitability of their lending is already on the decline. Besides, their non-interest income is likely to plummet in the wake of the recent problems related to derivative-linked funds and private equity funds. Moreover, small companies and businesses are going through a hard time with COVID-19 spreading, which is another factor adversely affecting the profitability of banks.