South Korean banks brace for bleak profitability in 2012

The combined net income of South Korea’s banking system plunged 59% during the second quarter.

Analysts said the fall was caused by a combination of weak asset sales, narrower loan margins and increased provisions for bad debts imposed by the government as the Korean economy slows.

Profit prospects for banks, including KB Financial Group Inc. and Hana Financial Group Inc., are waning as the economic slowdown forces them to set aside more cash for bad loans and the central bank cuts interest rates to prod growth.

Net income for the banking system’s 18 lenders fell to US2.1 billion in the three months ending June 30 from US$5.1 billion year-on-year when they made US$2.8 billion from the sale of Hyundai Engineering & Construction Co. shares, said the government’s Financial Supervisory Service.

Net interest margin, a key measure of profitability from lending, dropped to 2.13% last quarter from 2.32% a year earlier. Loan-loss provisions rose to US$2.1 billion from US$1.9 billion.

Kookmin Bank, South Korea’s biggest lender, said recently that its second-quarter profit dropped 33% from a year earlier after it set aside more funds for bad debt.