Shinhan Profit Drops 35% as Provisions Rise, Loan Margin Narrows

July 31 (Bloomberg) -- Shinhan Financial Group Co., South Korea’s largest financial company by market value, said second-quarter profit slumped as provisions for bad loans rose and the lending margin narrowed.

Net income fell to 631.4 billion won ($558 million) in the three months ended June 30 from 964.8 billion won a year earlier, when the company gained 352.2 billion won by selling a stake in Hyundai Engineering & Construction Co., Shinhan said in an e-mailed statement. The average of 26 analyst estimates compiled by Bloomberg was for 654.1 billion won profit.

Shinhan joins KB Financial Group Inc. in reporting lower earnings as lenders set aside more funds for potential losses on loans to builders, shipping lines and households amid slower economic growth. Profit may erode further as the central bank’s interest-rate cut earlier this month shrinks loan margins.

“Provision costs pressured earnings last quarter,” Kim Eun Gab, a Seoul-based analyst at NH Investment & Securities Co., said before the results were published. “Earnings momentum should further wane in the second half. Shinhan and other banks may have to add buffers against potential losses amid unstable economic conditions.”

Shares of Seoul-based Shinhan gained 2.1 percent to 36,200 won at the 3 p.m. close of trading before the earnings were released. The shares have lost 8.9 percent this year, more than the 57-stock Korea Financial Industry index’s 1 percent decline.

Higher Provisions

Loan-loss provisions rose 13 percent last quarter from a year earlier to 326.2 billion won, Shinhan said. The net interest margin, a measure of lending profitability, narrowed to 2.52 percent from 2.72 percent a year earlier and 2.57 percent in the previous quarter.

Non-performing loans climbed to 1.48 percent of total credit from 1.45 percent three months earlier.

The Bank of Korea unexpectedly cut the benchmark rate a quarter point to 3 percent on July 12 and signaled it would act preemptively to protect against a slowing global economy. The central bank later lowered its 2012 growth forecast to 3 percent from 3.5 percent, its second downgrade this year.

Combined earnings at South Korea’s 18 lenders including Shinhan’s banking unit plunged 59 percent last quarter from a year earlier when the lenders posted gains from selling stakes in Hyundai Engineering, the Financial Supervisory Service said yesterday. Increased provisions and smaller loan margins weighed on their profits, it said.

To contact the reporter on this story: Seonjin Cha in Seoul at

To contact the editor responsible for this story: Chitra Somayaji at