Fitch: South Korea Banks to see strong 2006, competition could crimp profits

Fitch Ratings said it expects a better year for South Korean banks in 2006.

South Korea's banks reported good levels of core profitability over the first half of 2006, with a pre-provisioning return on assets of 1.90% for the seven national commercial banks covered by Fitch (which in turn account for 63% of system-wide assets).

Nevertheless, Fitch said this was down from 2.02% in the first half of 2005 due to margin pressure as a result of intensifying competition, which is likely to continue going forward.

Notably, the national commercial banks' net profitability was actually better in the first half of 2006 than the first half of 2005, with net return on assets improving sharply to a high 1.56% from 1.28%. This was partly due to a decline in provisioning charges to a very low level amid a very benign economic environment, with the reversal of provisions being a prominent feature - both on corporate national commercial banks, which arose out of South Korea's 1998 financial crisis, and consumer national commercial banks from the country's 2003 credit card crisis, the agency noted.

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