Credit card defaults and a corporate fraud halved combined profits at South Korean banks including Kookmin Bank in 2003, but profits should triple in 2004 as the economy recovers, a financial regulator said on Tuesday.
The rebound in earnings began in the fourth quarter, when profits more than quadrupled as Asia's fourth-largest economy picked up after emerging from a brief recession and the government cracked down on easy credit.
Combined net profit at the country's 19 banks plunged 48 percent to a provisional 2.67 trillion won ($2.25 billion) in 2003 from 5.08 trillion in 2002, the Financial Supervisory Service said in a statement. The banks expect 7.51 trillion won of profits in 2004.
South Korean lenders had a tough 2003 because of ballooning losses at credit card units. In addition, there was heavy provisioning against loans to SK Networks Co, which is struggling to emerge from a $1.2 billion accounting fraud unearthed in March.
Banks are still struggling with the aftermath of a credit boom that has left one in 10 South Koreans unable to repay loans and inflated credit card debts to 14 percent of gross domestic product.
At the heart of the card crisis was LG Card Co, the country's biggest credit card issuer, which averted bankruptcy after lenders agreed to a $4.5 billion rescue plan this month.
"In the long run, the outlook for the banking sector remains bright, but the LG Card issue hasn't yet wrapped up completely and banks may incur additional costs from LG Card," a fund manager said.
For the fourth quarter of 2003, the banks posted a net profit of 1.04 trillion won, up sharply from 211.1 billion won a year earlier due mostly to tougher provisioning rules introduced in late 2002.
Analysts said banks appeared to be gradually regaining control of asset quality.
There was a modest improvement in credit card delinquencies in recent months, particularly those overdue for less than one month, an indicator of fresh delinquencies. There was also a significant slowdown in fresh credit extensions.
Banks' burden from provisions for soured consumer loans should begin to ease in the next two quarters once the full impact of deteriorating collection ratios has been absorbed, analysts said.
Card companies have tightened rules for issuing new cards since late 2002 and limited credit ceilings for multi-card holders to pull down the delinquency ratios. The average South Korean adult carries about four credit cards.
"Those banks with larger exposure to LG Card, like Kookmin, will take longer to see a recovery in earnings as they will need to set aside more provisioning. Overall, a notable profit recovery won't be seen until the second half," said Jang Seung-hoon, an analyst at SK Securities.
The regulator did not break down profits at each bank. Major South Korean banks, including Kookmin Bank, are expected to release quarterly results early next month.
Non-performing loans in the categories of substandard and below rose to 2.6 percent of total loans by the end of December, from 2.3 percent a year before, the agency said.
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