Hana Financial Profit Drops as Bad-Debt Provisions Increase

Hana Financial Group Inc., South Korea’s third-largest banking group by assets, said second-quarter profit dropped 54 percent after it set aside more provisions for bad debt.

Net income fell to 225.1 billion won ($196 million) from 489.8 billion won a year earlier, when Hana booked one-time gains from a stake sale, the Seoul-based company said in a regulatory filing today. Earnings missed the 308 billion-won average of 27 analyst estimates compiled by Bloomberg.

Hana Financial more than doubled its bad-loan provisions to 226.4 billion won last quarter as regulators urged lenders to strengthen balance sheets amid slowing economic growth. 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.

“Hana is adopting a more conservative standard in loan classification at its Korea Exchange Bank by raising its total bad-loan provision,” Koo Kyung Hwe, a Seoul-based analyst at Hyundai Securities Co., said before the earnings were released. “The global and domestic environment isn’t favorable for banks and it’s hard to expect sharp loan and profit growth at banks in the second half given current economic and market conditions.”

Hana fell 1.2 percent to 33,900 won at the close of Seoul trading before the earnings were reported. It has fallen 4.6 percent this year, compared with the benchmark Kospi index’s 0.4 percent decline.

Margin Narrows

The Bank of Korea last week reduced its 2012 economic-growth forecast for the second time this year, after it unexpectedly cut interest rates and signaled it would act preemptively to protect against slowing global growth.

South Korea’s economy will expand 3 percent this year, the central bank said in a statement on July 13. The forecast was lowered from an April estimate of 3.5 percent and 3.7 percent growth predicted in December.

Bank of Korea Governor Kim Choong Soo said July 12 the board lowered its benchmark rate a quarter percentage point in response to deteriorating external conditions.

Hana’s net interest margin, a measure of lending profitability, narrowed 11 basis points from a year earlier to 2.2 percent, 2 basis points higher than the previous quarter, the company said in a statement on its website.

The central bank’s rate cut will shave about 50 billion won a year from interest income at the lender’s Hana Bank and Korea Exchange Bank units as margin narrows, Lee Woo Kong, a managing director at Korea Exchange Bank, said on a conference call today.

Stake Sale

In the year-earlier quarter, Hana Bank booked a 137.4 billion-won gain from the sale of 1.58 million shares in Hyundai Engineering & Construction Co. Bad-loan provisions in the year-ago period totaled 88 billion.

Korea Exchange Bank, the lender Hana Financial bought from Dallas-based Lone Star Funds earlier this year, said second-quarter profit dropped 86 percent to 161.1 billion won from a year earlier, according to a separate regulatory filing. Hana’s second-quarter earnings include its 60 percent stake in Korea Exchange Bank.

Hana booked costs of 111.5 billion won last quarter including the write off of negative goodwill from the Korea Exchange acquisition and a decline in the value of equity holdings in other companies, it said.

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