Nov. 3 (Bloomberg) -- Shinhan Financial Group Co., South Korea’s second-biggest financial company by market value, posted a larger-than-estimated 52 percent gain in earnings, helped by more profitable lending. Korea Exchange Bank’s profit also rose.

Net income at Shinhan rose to 491.3 billion won ($418 million) in the three months ended Sept. 30 from 323.3 billion won a year earlier, the Seoul-based company said today. That beat the 387.8 billion won median of nine analysts’ estimates compiled by Bloomberg.

Shinhan and Korea Exchange Bank join local rivals in reporting wider lending margins as South Korean banks lower rates they pay on deposits to keep pace with the country’s record-low interest rates. Bank earnings are likely to improve further as an economic recovery reduces bad-loan provisions, the Financial Supervisory Service said today.

“The good streak is likely to continue, with interest margins improving, as long as we don’t see any unexpected economic shock,” said Kim Jae Woo, a banking analyst at Samsung Securities Co. in Seoul.

South Korea’s financial regulator has told lenders to lower their bad-loan ratio to less than 1 percent of outstanding credit by the end of the year. The ratio at Shinhan’s banking unit dropped to 1.44 percent at the end of September. Korea Exchange Bank’s non-performing loan ratio fell to 1.25 percent.

Asia’s fourth-largest economy expanded 2.9 percent in the third quarter, the fastest pace in seven years. Factory production rebounded in September and consumer confidence rose to a seven-year high in October.

Korea Exchange Bank

Korea Exchange Bank, the lender Lone Star Funds is seeking to sell, said today that third-quarter profit almost tripled to 422.1 billion won, beating the median estimate of 223.7 billion won from six analysts surveyed by Bloomberg.

Profit was boosted by a refund of 230 billion won for taxes it paid stemming from the 2004 acquisition of a credit-card unit, the Seoul-based lender said in an e-mailed statement. Korea Exchange Bank shares fell 3.8 percent to 12,800 won today in Seoul before earnings were released. Shinhan Financial shares dropped 2.3 percent to 44,750 won.

Samsung’s Kim said there is a risk of a temporary setback in bank earnings in the fourth quarter from lenders clearing bad loans from their books.

The combined net interest margin, a measure of profitability from lending, at the Shinhan Bank and Shinhan Card units widened 28 basis points to 3.05 percent at the end of September from three months earlier. Korea Exchange Bank’s net interest margin gained 32 basis points to 2.49 percent. A basis point equals 0.01 percentage point.

Interest Margin

The quarterly increases compare with KB Financial Group Inc.’s gain of 4 basis points and Woori Finance Holdings Co.’s 19 basis points. Hana Financial Group Inc., South Korea’s fourth-biggest financial company, said Oct. 23 its net interest margin increased 29 basis points.

The profit gain would help bolster Korea Exchange Bank’s value as its Dallas-based owner seeks to sell the lender. Lone Star founder John Grayken said Oct. 1 he expected to sell the controlling 51 percent stake in six to 12 months.

KB Financial, South Korea’s largest financial company by assets, said Oct. 29 it remains interested in buying Korea Exchange Bank. In 2006, KB Financial’s Kookmin Bank unit scrapped its plan to buy the smaller rival amid legal probes into the circumstance of Lone Star’s 2003 purchase of Korea Exchange Bank.

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

Last Updated: November 3, 2009 02:09 EST