Korea's commercial banks suffer 29.5% profit drop

Policy banks saw 134.2% profit dive.

According to Moody's, the 53.7% year-on-year fall in net profits recorded for FY2013 (January-December) by the Korean banking sector is in line with expectations.

Key drivers behind the decline were lower margins, higher provisions and impairment losses.

Here's more from Moody's:

Commercial banks and regional banks saw their net profits fall 29.5% and 9.8%, respectively, while policy banks suffered a fall of 134.2%, recording a total net loss of KRW 0.7 trillion, compared with a net profit of KRW2 trillion in 2012. Pre-provision profits in the sector declined 16.2% year-on-year, also in line with our expectations.

The 23bps decline in net interest margin (NIM) is in line with our expectations. It was driven by base rate cut of 25bps in May 2013 and intense competition. Signs that NIM is stabilizing are emerging, with quarterly NIM improving 4bps to 1.84% in Q4 2013.

Provision expenses at the high end of our estimates. Provision expenses, including contingent credit reserves, rose 5.9%, equating to credit costs of 81bps, or at the high end of our estimates. In particular, provisions rose due to the restructuring of STX Group (unrated) and the debt workout program of Keangnam Enterprises Ltd (unrated). Higher provision expenses were concentrated in policy banks owing to their greater exposures to risky sectors, and which also explains their relative underperformance.

Asset quality remains a key challenge. Total provision expenses, including contingent credit loss reserves, increased 5.5% year-on-year in 2013. Given possible additional provisions stemming from the case of fraudulent loans involving KT ENS1 (unrated), final credit costs could exceed the current implied level of 81bps, compared to 78bps in 2012.

Non-operating losses increased to KRW1.8 trillion in 2013 from KRW0.7 trillion in 2012. This development reflects weaker performance and greater losses at associated companies, which are accounted for as equity method affiliates. Losses were concentrated at companies in which policy banks had acquired partial ownership via loan-to-equity swaps, when those companies were undergoing restructuring.