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Korean banks' margins widened, profit fell: the swing factor is the bond book
Interest income rose 8.3% to 32.2 trillion won in the first half, but a 5.7 trillion won swing in securities results turned that into a 6.4% profit decline.
The Investor · Invest desk
What happened
- The FSS's preliminary figures put first-half net profit at domestic Korean banks at 13.8 trillion won, down 6.4% from 14.7 trillion won a year earlier.
- Interest income rose 8.3% to 32.2 trillion won, helped by net interest margin widening to 1.56% from 1.52% and 6.4% growth in interest-earning assets.
- Non-interest income fell 43.4% to 2.9 trillion won, with securities-related results turning to a 2.5 trillion won loss from a 3.2 trillion won profit.
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Why it matters
- exposure Rate direction now reaches the profit line from both ends: a bond rally that unwinds the valuation losses would also strip out the market-rate support that widened the margin.
- constraint With non-interest income down to 9% of interest income, there is very little left in the mix to absorb a bad quarter, so reported profit tracks market rates far more closely than it did.
- decision Building loss-absorbing capacity is now a claim on shrinking earnings rather than a slice of a growing pool, so the FSS request competes directly with everything else banks want to fund.
- precedent The supervisor's framing treats deteriorating credit soundness, not the profit decline, as the binding issue for the rest of the year, which sets what banks will be asked for next.
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 [14]. The entire improvement in lending revenue was 2.5 trillion won [5]. The bond book was therefore worth roughly 2.3 times as much to the reported result as everything the loan book gained [15], 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% [6], and higher market rates enlarged the losses on securities [7]. 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 [6], a 4.5 trillion won swing in valuation results on the other [16].
It is worth separating volume from price inside that 8.3% interest income gain. Interest-earning assets grew 6.4% [6], while the margin improvement is worth about 2.6% in relative terms [17]. 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 [5], non-interest income down 2.3 trillion [7], selling and administrative expenses up 700 billion [10], loan-loss expenses up about 280 billion [18]: a net 780 billion won of pre-tax deterioration [19], 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% [20]. 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 [12]. Loan-loss expenses of 3.5 trillion won were already 8.6% up on last year [11]. 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" [13].
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 [21]. Their gain does not move the sector's arithmetic. The marks on the bond portfolios do.
What to watch
- Whether market rates fall in the second half, which would reverse the valuation marks but also remove the support behind the 4 basis point margin gain.
- The end-September delinquency reading, and how much extra provisioning the FSS extracts from banks whose profit is already down.
- Whether specialized banks, down 12.0%, repeat that decline or prove to have been a one-off casualty of the securities marks.