The profitability of domestic banks in Korea was weakened in 2009 according to a preliminary report by the Financial Supervisory Service on Korean domestic banks' earnings in 2009. The preliminary report showed that the combined net income of domestic banks was 7.1 trillion won in 2009, down 700 billion won or 8.6% from 7.7 trillion won in 2008. Domestic banks' net income in the fourth quarter, meanwhile, stood at 1.5 trillion won, down sharply from 2.9 trillion in the third quarter.
As a result of a drop in market rates, domestic banks' net interest margin (NIM) fell by 0.33%p to 1.98% in 2009, down from 2.31% in 2008, and causing banks' interest income to fall by 2.3 trillion won to 32.2 trillion won for the cited period. However, with market rates starting to trend higher from the second half, banks' NIM in the fourth quarter widened over the third quarter from 1.92% to 2.33%. Furthermore, their interest income rose from 7.8 trillion won to 9.3 trillion won during the same period.
As asset soundness deteriorated, bad debt expenses increased by 2.3 trillion won or 21.9% to total 12.8 trillion won in 2009, up from 10.5 trillion won in 2008. Bad debt expenses of 3.3 trillion won in the fourth quarter was considerably higher than the 1.9 trillion won in the third quarter, following the corporate restructuring drive of SME during the period as well as the workout proceedings of affiliates of the Kumho Asiana Group and some shipbuilders in December.
Despite the falls in foreign exchange (FX)/derivatives and fees income in 2009, down from 2.4 trillion won to 1.3 trillion won and 4.2 trillion won to 3.9 trillion year on year, respectively, non-interest income rose slightly from 5.1 trillion won to 5.3 trillion won as a result of a sharp increase in securities-related income, up from 700 billion won to 3.3 trillion won following the recovery of the stock market and the equity sales of converted debt. Meanwhile, securities-related income decreased to 300 billion won in the fourth quarter, following a downward trend that started in the third quarter of 2009.
The FSS report stated, “As an inchoate economic recovery continues to take hold, leaving the tentacles of last year's global financial crisis behind, domestic banks' profitability is showing signs of slowly improving, with loan loss provisions steadily being retrenched and NIM gradually recovering from a rise in market rates,” the report went on to add, “Profitability weakened again in the fourth quarter, however, from a large amount of distressed assets being recognized on the heels of an intensified corporate restructuring drive and the resolution of non-performing loans during the period. Insofar as it relates to the possibility of a double dip in the global economy and the ongoing discussions of an exit strategy, the ability of troubled firms and low-income households to service debt continues to pose as potential areas for concern. However, domestic banks' profitability is expected to progressively improve given that the distressed assets of restructuring companies were recognized early and the reduction of non-performing loans has continued unabated.”