KB Financial Group Chairman Yang Jong-hee speaks during an event at the Korea Federation of Banks building in central Seoul, Sept. 24. Joint Press Corps

Major domestic financial groups have achieved record-high net profits, exceeding 4 trillion won ($2.9 billion) through the third quarter of this year, according to industry officials, Sunday.

Although interest margins have contracted due to expectations of domestic and international benchmark rate cuts, overall interest income has increased, driven by a rise in household and corporate loans in the context of higher house prices and corporate funding challenges.

Additionally, the pressure from financial authorities to curb household loans has led banks to raise loan spreads, which has significantly helped sustain their profitability.

The cumulative net profits for KB Financial Group and Shinhan Financial Group, the top two players in the industry, have both set record highs through the third quarter of this year.

KB's net profit for the first three quarters reached an all-time high of 4.39 trillion won.

The third-quarter net profit alone was 1.6 trillion won, a 17.9 percent increase from 1.36 trillion won in the same quarter last year, marking the highest third-quarter profit since its founding.

For Shinhan, cumulative net profit through the third quarter was 3.98 trillion won, a 4.4 percent increase over the same period last year when it reported 3.81 trillion won in net profit.

Shinhan Financial Group Chairman Jin Ok-dong speaks during an event at the Korea Federation of Banks building in central Seoul, Sept. 24. Joint Press Corps

The firm's highest-ever cumulative third-quarter net profit was recorded in 2022 at 4.31 trillion won, but during this time, a one-time gain of 322 billion won from the sale of a securities unit building was included. Excluding this one-time gain, this year's profit marks a new record.

Moreover, considering that a loss of 135 billion won from unauthorized futures trading, which occurred in August, was reflected in the third quarter, the company's net profit significantly surpassed previous records.

Woori Financial Group's cumulative net profit for the third quarter reached 2.65 trillion won, a 9.1 percent increase year-on-year. This nearly matches the record high of 2.66 trillion won for the third quarter of 2022, falling short by just 3 billion won.

The third quarter of this year saw a clear drop in market interest rates, as expectations for rate cuts by the U.S. Federal Reserve and the Bank of Korea were reflected in advance.

Typically, falling interest rates negatively impact bank profitability, because loan interest rates tend to decline faster than deposit interest rates, reducing the loan-deposit interest rate margin.

"In an interest rate downturn cycle, banks typically experience a decline in their net interest margin (NIM)," an official from a major bank said.

Shinhan's NIM for the third quarter was 1.9 percent, down 0.05 percentage points from the second quarter and 0.09 percentage points lower than the third quarter of last year.

Similarly, KB's NIM for the third quarter was 1.95 percent, representing a decrease of 0.13 percentage points from the second quarter and a decline of 0.14 percentage points compared to the third quarter of last year.

Despite the deterioration in profitability indicators, Shinhan's net interest income for the third quarter reached 2.85 trillion won, reflecting a 3.3 percent increase from the previous year. KB's interest income for the third quarter was 3.16 trillion won, up 1.3 percent from the previous year.

The increase in interest income — despite the decline in NIM — can be attributed to the growing volume of household and corporate loan assets, which offset the impact of margin compression.

In particular, during the third quarter, soaring housing prices in the Seoul metropolitan area led to a surge in household loans.

Ironically, the household loan restriction policies implemented since July have significantly contributed to enhancing the profits of financial groups. By raising the spreads added to the basic loan rates, banks were able to limit the expected reduction in loan-deposit interest rate margins.