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Second-tier banks struggle with worsening bottom lines amid rising interest rates

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Leading commercial lenders post higher earnings in Q1

By Yi Whan-woo

Second-tier banks are struggling with record quarterly losses for the first time in almost nine years, following more than a year of rate hikes, which affected their customers more than first-tier bank customers when making repayments.

Their losses contrast starkly with the windfall profits being enjoyed by first-tier banks for consecutive quarters, at a time when the benchmark interest rate stands at the 14-year high of 3.5 percent.

According to the Financial Supervisory Service's (FSS) data, Sunday, a total of 79 second-tier banks nationwide logged a combined loss of 52.3 billion won ($39.92 million) in the first three months of the year.

Second-tier banks, also known as savings banks, deal with people who have a relatively low crediting rating, due to their income or other payment capabilities, and are thus rejected by first-tier banks when looking to take out loans.

The dismal January-March performance came after the second-tier banks posted a net profit of 456.3 billion won in the previous quarter, and marks their first quarterly loss since the second quarter of 2014.

In contrast, the first-tier banks reaped a net profit of 7 trillion won in the first quarter, up from 5.6 trillion won three months ago.

Industry sources attributed the second-tier banks' losses to a higher number of delayed repayments made by their customers compared to those of first-tier banks.

"The rate hike equally increased the amount of interest to be paid by all borrowers, but because second-tier bank clients are financially less stable, they were more likely to struggle with repayments," a public relations staff member at a first-tier bank said.

The source said that the business strategy of second-tier banks in attracting new customers is beginning to backfire, referring to their increase in deposit rates of up to 6 percent annually.

The measure was taken in response to a liquidity shortage in the short-term debt market over the so-called Legoland Crisis in the fall of 2022.

The crisis led to a cash inflow into banks from the aforementioned market. Because there are more second-tier banks than first-tier banks, the competition to draw new customers with a high deposit rate was severe for second-tier banks.

The deposit interest paid by second-tier banks accordingly more than doubled to 1.3 trillion won between the October-December period in 2022 and the January-March period.

Sources said that the second-tier banks are struggling with the aftermath of the Legoland Crisis, which involved real estate project financing (PF) firms.

The remaining balance of the PF-related loans amounted to 10.79 trillion won in the first quarter, which has more than doubled from 4.2 trillion won in 2017.

Asking not to be named, a second-tier bank official speculated that the profitability of the second-tier banks may increase when the key interest rate begins to drop.

Yi Whan-woo


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