Kookmin Bank South Korea's top lender, on Monday reported a 41 percent rise in quarterly profit that beat forecasts, and said the $7.3 billion take-over of a rival was expected to be completed by year-end.
Bad debt provisions fell more than 70 percent from a year earlier after it wrote off a big chunk of problem loans over the past few years and as loan default rates fell.
Kookmin also kept lending margins relatively stable, in contrast to its rivals who cut margins to win business. "Unlike Woori Financial or Hana Kookmin did not experience the squeeze in NIM (net interest margin), so its earnings look healthier," said Lim Chang-gue, fund manager at Samsung Investment Trust Management.
Kookmin's NIM fell to 3.81 percent at end-June from a revised 3.94 percent three months earlier, but was comfortably above margins of less than 3 percent for local peers. Kookmin, with assets of $200 billion, turned in a 3 percent rise in second-quarter lending from three months ago, dwarfed by Woori's increase by 11 percent and a similar rise at Hana.
"I don't expect any earnings surprises or very strong earnings momentum. But entering the second half, the competition will ease, and we'll see more stable earnings growth," Lim said. Kap Shin, Kookmin's chief financial officer, told a teleconference that he expected the acquisition of Korea Exchange Bank (KEB) to close before the end of 2006.
The deal, which is pending regulatory approval, would solidify Kookmin as the country's biggest bank, controlling more than 35 percent of the sector with assets topping $260 billion, analysts say. Shin also said it would be hard for Kookmin to maintain its lower bad-debt ratio, which analysts said probably reflected a softening in the pace of the economy.
Kookmin, which claims one of every two South Koreans as a customer, earned a net profit of 777.0 billion won ($814 million) for the quarter ended June, above an average forecast of 712.8 billion won from nine analysts surveyed by Reuters.
The net profit compared with 549.7 billion won a year earlier and 803.0 billion won in the January-March first quarter.
Full-year net profit is seen rising by around a quarter to a record 2.80 trillion won, according to Reuters Estimates. Ahead of its results, Kookmin shares closed up 0.12 percent at 83,400 won, against a 0.06 percent rise in the broader market.
Its shares fell 7 percent in the June quarter, more than the market's 4.7 percent drop, as prosecutors investigated US-based buyout firm Lone Star's acquisition of KEB in 2003, delaying Kookmin's take-over.
Interest income at Kookmin climbed 5.5 percent to 1.7 trillion won in the second quarter from a year ago, outrunning a 0.2 percent increase in non-interest income. The ratio of overdue loans eased to 1.29 percent of total credit, higher than 1.05 percent at No 3 banking group Woori.
Analysts do not expect further sharp falls in lending margins because banks started reining in new lending in June after the government moved to cool soaring housing prices in some parts of the country, and as worries about inflation increased.
South Korean banks are expected to earn record net profits in 2006 after they sell stakes in restructured firms, including LG Card and as interest income remains solid.
But a decline in consumer spending and mortgage lending could spell a slowdown in asset growth at Kookmin and other banks as the government pushes them to tighten household lending. Planned deregulation that will help brokerages and insurance firms expand into the asset management business, now dominated by banks, is also clouding the industry outlook.
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