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Asia300

Top three South Korean banking groups post robust 3Q profits

But rising debt, government clampdown on mortgages loom over sector

Office workers use automated teller machines at a bank in Seoul.   © Reuters

SEOUL -- The three leading banking groups in South Korea posted better-than-expected earnings in the third quarter, as interest rates look set to be hiked as early as November. 

Shinhan Financial Group said Monday that net profit attributable to shareholders reached 817.3 billion won ($726.7 million) in the July-September period, up 15.4% from a year ago. That helped its accumulated net profit for the first nine months to spike 25.1% to 2.7 trillion won from the previous year, putting it on track to earn more than 3 trillion won this year.

Hana Financial Group also performed well, marking a net profit increase of 13.3% to 510 billion won during the same period. But KB Financial Group was the outperformer, with a net profit rise of 59.0% to 897.5 billion won for the three months through September from a year ago, due to rising interest income and improved earnings from nonbanking affiliates. 

"We believe market rates have broken through a plateau on further tightening of financial markets and increasing hawkishness of the Bank of Korea," said David Hwang, an analyst at Nomura. "Elevated geopolitical risks related to North Korea" also helped the sharp pick-up in interest rates, he added.

Market rates in the country have risen 40 basis points through the end of September to October, after stagnating between April and August, Nomura said.

But analysts say that the government's strict mortgage rules will weigh on banks' performance next year. The Ministry of Strategy and Finance announced last week that it wanted to curb rising household debt by imposing stricter mortgage rules.

"The government's household debt policy is to limit the total amount of household debt. It signals that you should borrow as much as you can pay back," said Kim Soo-hyun, an analyst at Shinhan Investment. "It is no more possible to buy homes with excessive leverages from banks. It means that growth of household debt will slow down."

The finance ministry said that it will apply new debt-to-income ratio rules from January, reflecting all of a borrower's principal and interest as debt if he or she has two or more mortgages. The new regulation also calculates a borrower's income more strictly, requiring income data for two years from the current one year.

The three banking groups saw their financial soundness improve in the quarter. KB had 2.178 trillion won of nonperforming loans as of September, with an NPL ratio of 0.77%, down from 0.90% a year ago.

Shinhan's NPL ratio fell to 0.64% from 0.86% a year ago. Hana's NPL ratio improved to 0.73% from 1.11% over the same period.

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