Korean banks' margins widened, profit fell: the swing factor is the bond book

The securities line moved 5.7 trillion won year on year, from a 3.2 trillion won profit to a 2.5 trillion won loss ^[1]. The entire improvement in lending revenue was 2.5 trillion won ^[4]. The bond book was therefore worth roughly 2.3 times as much to the reported result as everything the loan book gained ^[2], and it pointed the other way.

The FSS attributes both movements to the same cause. Higher market rates lifted net interest margin to 1.56% from 1.52% ^[5], and higher market rates enlarged the losses on securities ^[6]. The asymmetry is in the speed. A bond portfolio remarks at once; a loan book reprices in basis points over quarters. Four basis points of margin on one side ^[5], a 4.5 trillion won swing in valuation results on the other ^[3].

It is worth separating volume from price inside that 8.3% interest income gain. Interest-earning assets grew 6.4% ^[5], while the margin improvement is worth about 2.6% in relative terms ^[4]. Most of the extra interest income came from lending more, not from lending at better spreads.

The four lines the FSS breaks out roughly account for the drop. Interest income up 2.5 trillion won ^[4], non-interest income down 2.3 trillion ^[6], selling and administrative expenses up 700 billion ^[9], loan-loss expenses up about 280 billion ^[5]: a net 780 billion won of pre-tax deterioration ^[6], against a 900 billion won fall in net profit ^[2].

A year ago, non-interest income equalled 17.5% of interest income. It is now 9.0% ^[9]. Whatever these banks earn outside the spread between deposits and loans has become a rounding difference next to what they earn from it.

Underneath, the credit line grinds. Delinquency reached 0.56% at the end of June, and each reading in the FSS series since 0.25% at the end of 2022 has been higher than the one before it ^[11]. Loan-loss expenses of 3.5 trillion won were already 8.6% up on last year ^[10]. The regulator said it plans "to continue encouraging banks to build up their loss-absorbing capacity, including through provisioning, so that they can maintain soundness even against unexpected shocks" ^[12].

The one group that grew was internet-only banks, up 15.1% to 400 billion won [c3a], which is about 3% of sector net profit ^[10]. Their gain does not move the sector's arithmetic. The marks on the bond portfolios do.