A Dandy Outlook for Banks

Profits to keep rolling in for banks due to wide net interest margin, investments

The Korean economy has been able to muster a solid growth of 5.7 percent in the H1, helped by steady expansion of economies of major trading countries including the U.S., Japan and China, boosting imports of Korean products.
But the economic growth in the H2 is likely to fall to around 4 percent due to worsening trading conditions sparked by high oil prices and belt-tightening by major trading countries such as the U.S., the EU, Japan and China, which will lead to reduced consumer spending to slow down GDP growth.
Curtailed economic policies in the United States, the EU, Japan and China will cause boosts in interest rates, which will, in turn, reduce the global liquidity and end the growth of the global economy.
Increased financial expenses will bring down the prices of assets including real estate and impact the real economy with reductions in consumer spending and facility investment. It will also set off price readjustment of risky assets with investors opting for sound properties. It will also have considerable damaging impact on the stock and foreign exchange markets due to changes in the emerging financial market.
Banks will have a considerable rough time expanding their businesses and profitable assets due to slow down in the economy related to the expansion of austerity measures. But their profit levels would not be affected by the sluggish economy with the growth in the ability to repay debts by households and reductions in the number of corporate bankruptcies, while the soundness of their assets continuous to be sustained in the most superior level.
Banks will also refrain from engaging in tough competition to provide loans in the second half with the slow down in the economy as their competition to provide loans is predicated on the surge in economic growth. The scale of their outstanding loans won't be reduced because their shunning tough competition doesn't mean that they will continue to provide loans in the same scale maintained in the H1.
Banks have been seeing their deposits rise due to investors preference for safe assets and put their funds in banks due to increases in variables in the stock and the foreign exchange markets. Banks cannot afford to sit tight, but manage their assets somehow and earn profits for those assets.
Banks, on the other hand, will find hard time making non-banking earnings due to increases in the variables in the stock and foreign exchange markets. Banks have limited profits from the operations of bancassurance business due to tough regulations, it is hard to sell beneficiary certificates due to uncertainty in the stock market and the operation of commodity certificates have not been easy also due to changes in the business environment.
The only way for them to make profits is through loan operations. The households ability to pay interests on their debts has been improving since 2002 with the disposable household income rising and the bankruptcy rates among corporations has been falling, hitting the lowest since 1991. Corporate loans are likely to increase more and more down the road and household mortgage loan demand will increase continuously, although it will be down momentarily.
Banks expect to record the largest profit in the H2 through the sale of their stakes in the LG Card when the company is sold off and increases in the net interest margin with the rise in loan interest rates. They are expected to make large profits and fees into the Q3 with improved soundness of credit risks in household and corporate loans and continued soundness of banks assets.
But in the Q4, banks are likely to experience downturn in their profits due to cuts in interest rates reducing NIM and slow loan growth rate. Slowdown is expected in household loans with the real estate market cool down and other profit sources will be hard to be found. Non-interest income to supplement interest income for banks would not be large enough causing uncertain future prospect for banks. Banks will record the largest profit in their history in the H2 through the sale of their stock portfolios and other one-time profit charge. But the uncertain nature of their structural income will continue to hound their future prospects. nw