KB Financial Posts Loss as Provisions for Soured Construction Loans Rise
KB Financial Group Inc., owner of South Korea’s largest bank, reported an unexpected second- quarter loss as it set aside more provisions against soured construction loans.
The 335 billion won ($283 million) deficit in the three months ended June 30, compares with net income of 109.9 billion won a year earlier, the Seoul-based company said today in a regulatory filing. It was KB Financial’s first loss since it was set up as a holding company for Kookmin Bank and other affiliates in October 2008.
The result underscores the case for Chairman Euh Yoon Dae’s push to cut costs, reorganize the workforce and increase management efficiency. Euh likened the company to an “obesity” patient when he began his three-year term on July 13.
“I see the earnings from KB and other banks hitting the bottom in the second quarter with higher provisions,” said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd., which manages equivalent of $2 billion, in Seoul. “Earnings are likely to improve in the second half as lending margins will widen and credit cost will drop.”
KB Financial shares fell 1.5 percent to close at 51,500 won in Seoul, extending this year’s loss to 14 percent, before earnings were released. Analysts had expected KB Financial to post 355.1 billion won in profit, according to the average of 19 estimates compiled by Bloomberg in the past 28 days.
Kookmin Bank posted a 347 billion won in loss, its first since the three months through December 2008, in the midst of the global financial crisis.
Provision Cost
KB Financial’s provisions against loans and other costs rose to 1.5 trillion won in the quarter from 556 billion won a year earlier as it made extra reserves against loans for construction projects. Lenders need to set aside 2.2 trillion won in additional provisions to help construction, shipbuilding and shipping companies restructure debt, the Financial Supervisory Service said on June 25.
South Korea’s construction industry had its biggest annual contraction since at least 2008 in the second quarter, even as the nation’s gross domestic product expanded 1.5 percent, the Bank of Korea said on July 26. The government is contemplating steps to boost the property market after home prices in Seoul fell for three straight months through June.
After setting aside provisions “conservatively” during the first half, credit cost should decline in the second half, Chief Financial Officer Kap Shin said in a conference call with investors today.
Widening Margin
Kookmin’s net interest margin, a key measure of profitability from lending, widened by 53 basis points to 2.69 percent from a year earlier and narrowed 13 basis points from 2.82 percent from the previous quarter. A basis point equals 0.01 percentage point.
KB expects the margin at the lending unit to rise to near 3 percent around the fourth quarter of this year, as it expects South Korean authorities may boost interest rates again in the second half, Shin said.
The central bank on July 9 raised its benchmark interest rate to 2.25 percent from a record low 2 percent, a first hike since the global credit crisis.
To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net
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