Despite the impact on net interest margins of the central bank’s key rate cut in March, major banking groups saw their net earnings spike in the first quarter of this year from a year earlier.

But they are up against a harder challenge in the second quarter, as the prolonged low rate and the recently implemented loan transfer program is expected to cut into banks’ profits in the coming months.

Financial observers pointed out that banks will soon lose most of their momentum as it was mostly triggered by temporary events such as tax refunds and compensation lawsuit victories.

KB Financial Group, the nation’s second-largest banking group in terms of assets, made 605 billion won ($560 million) in quarterly net profit, up 68.7 percent from the same period last year. It also outran Shinhan Financial Group, which has been the biggest banking group since 2008.


The key factor was a 180 billion won tax refund, a result of litigation that the group won against the tax office.

Last year, KB Financial and its flagship Kookmin Bank were weighed down by a series of negative events, ranging from a massive customer information breach to a leadership dispute between the group chairman and the bank president.

NH Financial Group, also saw its earnings skyrocket, reflecting its takeover of the Woori brokerage houses late last year.The agriculture cooperative-based banking group achieved 137.6 billion won in net profit in the first quarter this year. This was up 4486.7 percent from the same period last year, when it had to make up for the bad debts of shipbuilding conglomerate STX Group.

But the second quarter is expected to be tough on banks as they are likely to struggle with prolonged low interest rates and an added burden from a government-led loan transfer program.

Hwang Seok-kyu, an analyst at Kyobo Securities, said in a report that low-rate loan transfers would cause estimated financial losses of 420 billion won to the domestic banking industry.

Last month, the government ran a temporary loan transfer program, allowing household borrowers to switch into long-term, fixed rate loans. The approved amount was 34 trillion won in total.

By Bae Hyun-jung (tellme@heraldcorp.com)