Korean banks are recovering despite falling profits and higher loan loss reserves in the first half of 2020
South Korea’s annual economic growth forecast is expected to fall to -1.9% in 2020 as the government implemented a series of stimulus measures and a quick recovery occurred in exports and overseas shipments. The economy shrunk by a seasonally adjusted 3.2% gross domestic product (GDP) growth in the second quarter, the sharpest decline since 2008, and gained a 1.9% growth in the third quarter. Rising exports were mainly from semiconductors as demand for chips increased sharply due to teleworking. Exports hiked 15.6% in the third quarter compared to three months from April to June, the fastest rate since 1986. Stimulus measures including the distribution of discount coupons have been implemented to encourage spending, thus accelerating the economic recovery. The government also spent more on social infrastructure projects.
The country’s consumer price index (CPI) gained 0.7% in August which hit a five-month high but still below the central bank’s 2% annual target. Higher agricultural product and services prices led to the stronger-than-expected inflation and therefore the Bank of Korea (BOK) has raised its inflation forecast to 0.5% in 2020. BOK has cut interest rates to a record low of 0.5% in 2020 and would like to hold the policy rate until 2021 as it would be still uncertain to evaluate the impact of the pandemic on both domestic and abroad and might increase by 25 basis points in 2022. Overall, South Korea’s economy returned to growth due to government stimulus measures and a surge in exports.
Commercial banking’s financial soundness still remained healthy while total assets have increased significantly during the COVID-19 pandemic period. Total assets of commercial banks surged to 10.2% by the end of first quarter of 2020 because the household and corporate loan demands accelerated. Banks’ household loans increased by $9.55 billion (KRW 10.4 trillion) and corporate loans increased by a larger amount for both small and medium sized enterprises (SMEs) and large enterprises by $10.29 billion (KRW 11.2 trillion) and $9.0 billion (KRW 9.8 trillion), respectively. Allowance for loan loss reserves jumped 157% on year to $3 billion (KRW 3.3 trillion) in the first half of 2020.
As for profitability, banks’ return on assets (ROA) was 0.58% and the structural profitability ratio declined to 0.90% in the first quarter of 2020. However, ROA stood at 0.49% in the January-to-June period and return on equity (ROE) was 6.68%, down 1.69% points during the same period. Banks’ operating income before reserves in the first half of the year was similar to last year’s results while net interest margin reached a record-low of 1.42% in the second quarter of 2020 amid lower interest rate trends in line with the declining ROA and ROE results. In contrast, the country’s top internet-only bank Kakao Bank reported that its operating profit nearly tripled in the first quarter by soaring demand for mobile loan services and stock trading accounts.