April 30 (Bloomberg) -- KB Financial Group Inc., owner of South Korea’s biggest bank, posted a bigger-than-estimated 62 percent decline in first-quarter profit as provisions for bad loans more than doubled in a slowing economy.

Net income fell to 238.3 billion won ($186 million) in the three months ended March 31 from 625.4 billion won a year earlier, Seoul-based KB Financial said in regulatory filings today. The median estimate of four analysts surveyed by Bloomberg was for 334 billion won.

The company may be forced to increase bad-loan provisions should Asia’s fourth-largest economy deteriorate more than forecast, Chairman Hwang Young Key said last month. Its Kookmin bank unit was one of South Korea’s first lenders to accept capital from a 20 trillion won state-backed fund this year.

“I believe KB’s disappointing results will continue through the second quarter on rising provisions, falling short of investor expectations,” said Kim Joo Hyong, who manages $3.7 billion in equities at Seoul-based KTB Asset Management Co.

Profit at Kookmin Bank fell 75 percent to 159.1 billion won. The Seoul-based lender posted its first quarterly loss in four years in the final three months of 2008.

KB Financial set aside 685 billion won against bad loans and other potential losses in the first quarter, compared with 273 billion won a year earlier. Non-performing loans as a percentage of total lending rose to 1.41 percent from 1.26 percent three months earlier and 0.79 percent a year earlier.

Kazakhstan Investment

Delinquent loans at Korean banks rose to 1.46 percent of total lending at the end of March, from 0.91 percent a year earlier, according to the country’s financial regulator. The International Monetary Fund forecasts the economy will shrink 4 percent in 2009 and grow 1.5 percent in 2010.

KB Financial rose 6.1 percent to 39,750 won in Seoul trading before earnings were released. The stock has gained 18 percent this year.

The firm was set up in September as a holding company for eight units including Kookmin. The figures from a year earlier are based on company estimates.

KB Financial’s first-quarter profit was also dragged down by losses related to its investment in Kazakhstan’s AO Bank Centercredit. Kookmin has a 30.5 percent stake in the Almaty- based lender and intends to raise its holding to 50.1 percent by February 2011, valuing its total investment at about $1.27 billion.

Kookmin said today it plans to buy a further 6.2 percent in the bank next month to become the largest shareholder.

Margins

KB Financial booked 100 billion won in valuation losses related to the investment in Centercredit, whose shares have slumped more than 80 percent since the August purchase. Hwang said on April 15 the company is considering options on how to buy the additional stake to take into account “recent changes in market situations.”

Profit across all of Kazakhstan’s banks plunged 93 percent to 15.4 billion tenge ($102 million) in 2008 from a year earlier as they boosted reserves to protect against delinquent loans.

Kookmin’s net interest margin, a measure of profitability from lending, dropped 29 basis points to 2.7 percent at the end of March from three months earlier. A basis point equals 0.01 percentage point. The margin may drop as much as 10 basis points in the second quarter, Chief Financial Officer Kap Shin told investors in a conference call today.

The bank’s Tier 1 ratio, a key measure of capital strength, increased to 10.29 percent after it raised capital including 1 trillion won from the state-backed recapitalization fund by selling hybrid bonds. Hybrid bonds combine elements of equity and debt and are lower rated than regular bonds.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net

Last Updated: April 30, 2009 03:42 EDT