By Kim Seung-yeon
SEOUL, Dec. 9 (Yonhap) -- South Korea's financial firms are expected to fare poorly next year and possibly for some years to come as the economy is experiencing a low-growth trend with a low-rate policy, the financial regulator said Sunday.
The Financial Supervisory Service (FSS) forecast that financial companies here will likely underperform in 2013, with a substantial number of players to swing losses in the following years should the low-growth and low-rate pattern continue.
"The financial sector grew at 6 percent in 2010 and 3.6 percent last year. We're expecting 2 percent this year and hopefully 3 percent in 2013, but most firms are drawing up plans for the worst," FSS Gov. Kwon Hyeok-se told reporters.
An FSS estimate showed that if the economy slows by 1 percentage point and the central bank cuts the key rate by the same margin, the combined net profit of 18 local banks will plunge 83.5 percent to 1.4 trillion won (US$1.29 billion) in 2017, compared with the tentative 8.5 trillion won expected for this year.
Based on this trend, South Korean banks could swing a net loss of 5.2 trillion won in 2022. Last year, banks raked in a record 11.8 trillion won in net profits.
The FSS said the case for insurance companies and brokerages will be much the same as that for banks as low rates are expected to squeeze their profits. The watchdog did not give specific estimates on financial firms apart from banks.
The watchdog's outlook came as the local economy loses steam amid the global economic downturn. The South Korean economy grew 0.1 percent on-quarter in the third quarter, the slowest since the first quarter of 2009, raising concern that Korea is entering a low growth trend.
To help prop up the economy, the Bank of Korea cut the benchmark rate twice this year -- a quarter percentage point in both July and October -- to 2.75 percent.
On the domestic front, a high level of household debts and the faltering property market should be handled with the utmost priority as they have been persistent problems for the economy, the FSS noted. Korea's household debts hit an all-time high of 937.5 trillion won as of the end of September, tantamount to about 78 percent of the country's gross domestic product for 2011.
The watchdog vowed to keep tabs on moves by financial firms in terms of their potential risks and financial soundness, while continuing to stabilize household debts and corporate financing.
"We'll make sure the financial firms are capable of absorbing losses and set aside reserves and secure liquidity to brace for risks coming from the low-growth, low-rate time," Kwon added.
The FSS head also added that the frozen corporate debt market needs to thaw as court receivership of Woongjin Group affiliates led local smaller firms to face difficulty in raising funds.
"Companies whose bond rates stand below A have difficulty in raising capital following the Woongjing debacle. The watchdog plans to talk with related government agencies to help ease the squeezed corporate debt market," he added.
Mid-sized construction company Kukdong Engineering & Construction Co. and its holding company, Woongjin Holdings Co. filed for court protection in late September after suffering from a pile-up in debt.
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