Korean banks are expected to post improved earnings for the third quarter, but the size of the profits will hinge on provisions for sour property-linked loans, analysts said yesterday.
Leading financial services groups Woori Finance Holdings and KB Financial Group are expected to post profits in the July-September period after suffering losses earlier, according to FnGuide, a financial information provider.
Woori Finance is projected to post around 451 billion won ($388.5 million) in net income, reversing a net loss of 41 billion won in the second quarter. KB Financial Group will report an estimated 500 billion won in earnings after losing 335 billion won in the April-June period, it added.
Analysts said the improved performance of Korean banks is mainly because some have benefited from the one-off sale of equity stakes.
Woori Finance and No. 3 industry player Shinhan Financial Group are likely to post about 200 billion won and about 100 billion won in one-time profits, respectively, from the sale of stakes in Hynix Semiconductor and Daewoo International.
The forecast came as the net income of Korean banks fell in the second quarter, hit by massive reserves related to corporate restructuring and distressed property loans.
Market analysts said the size of their third-quarter earnings will be affected by the amount they set aside in additional provisions for possible defaults in project financing (PF) lending. PF loans were extended mainly to builders on the basis of expected cash inflows from their construction projects.
The Financial Supervisory Service is in the process of introducing guidelines to tighten the standard of reserves for PF lending. Local banks may have to put aside funds worth 19 percent of property-linked loans as reserves for builders evaluated as ailing and in need of corporate restructuring.
"Local banks will inevitably have to set aside more reserves related to sour PF loans. The size of their third-quarter earnings may miss the market consensus," said Lim Il-sung, an analyst at Shinyoung Securities.
Analysts also estimate that Korean banks' net interest margins (NIMs), a gauge of profitability, are likely to fall in the third quarter, compared with three months earlier, as market rates have not risen as expected.
Local banks' lending rates are largely linked to the return on the 91-day certificates of deposit (CDs). Despite a July rate hike by the Bank of Korea, the rate on CDs rose marginally.
The FSS said NIMs stood at 2.31 percent in the second quarter, down from 2.4 percent in the first quarter.
"As the central bank is seen as hiking the key rate only once more within this year, local banks' NIMs are not likely to sharply recover," said Lee Hyeok-jae, an analyst at IBK Securities.
The BOK unexpectedly froze the rate at 2.25 percent for the second straight month in September on concerns about the flagging global economy.
In July, it raised the borrowing costs from a record low 2 percent, ending the 16th consecutive month of a stand-pat run
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