KB Financial Profit Falls as Bad-Loan Provisions Rise

KB Financial Group Inc. (105560), the owner of South Korea’s largest lender, said second-quarter profit dropped 33 percent after booking more provisions for bad debt.

Net income fell to 547.5 billion won ($481 million) in the three months ended June 30 from 817.3 billion won a year earlier when it booked gains from a stake sale, the Seoul-based company said in a regulatory filing today. Earnings were in line with the 545.3 billion won average of 25 analyst estimates compiled by Bloomberg.

KB joins Hana Financial Group Inc. (086790) in posting lower income as South Korean lenders strengthen buffers against soured loans to builders and small companies struggling with an economic slowdown in Asia’s fourth-biggest economy. Earnings may decline further this year a Bank of Korea rate cut aimed at stimulating growth hurts loan profitability and bad-loan provisioning continues, according to Nomura Holdings Inc.

“KB and other South Korean lenders will see net interest margins contract and provisions rise amid lingering uncertainty in the global economy,” Michael Na, a Seoul-based banking analyst at Nomura said ahead of today’s earnings release. “Korean bank shares will become more sensitive to external economic shocks rather than their earnings power.”

Shares of KB rose 2.1 percent to 34,500 won at the 3 p.m. close of Seoul trading before the earnings report. The stock has declined 5 percent this year, compared with a 3.4 percent drop in the 57-stock Korea Financial Industry index.

Higher Provision

KB set aside 364 billion won in loan-loss provisions last quarter, 20 percent more than a year earlier, according to the filing.

The Bank of Korea on July 13 cut its economic-growth forecast for this year to 3 percent, the second revision this year, after unexpectedly reducing interest rates and signaling it would act preemptively to guard against slowing global growth. The forecast was lowered from an April estimate of 3.5 percent and 3.7 percent growth predicted in December.

Banks’ combined debt provisions may rise by 1.1 trillion won as Korea’s prolonged real-estate slump forces more companies to restructure debt, the Financial Supervisory Service said on July 6.

Margin Squeeze

Net interest margin, a key measure of profitability from lending, was 2.93 percent in the last quarter, compared with 3.07 percent a year earlier and 2.97 percent in the first quarter.

Bank of Korea Governor Kim Choong Soo on July 12 cut borrowing costs for the first time in more than three years, joining an international push among central banks for monetary stimulus to counter threatens from the European debt crisis.

KB in the second quarter of last year booked a 413.9 billion won pretax gain after its lending unit sold a stake in Hyundai Engineering & Construction Co.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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