Korean banks, first-quarter net profit increased threefold... benefiting from high exchange rates

The won-to-US dollar exchange rate continued to strengthen in the first quarter of this year, with the Bank of Korea’s (central bank) net profit reaching three times the level of the same period last year, setting a record for the highest first-quarter performance in history.

According to the monthly balance sheet released by the Bank of Korea on the 28th, as of the end of March this year, the accumulated net profit for the period reached 4.2072 trillion won. This figure significantly increased compared to 1.3874 trillion won in the same period last year and far exceeded the previous first-quarter record—2.2165 trillion won in March 2020. The net profit by the end of February also reached 3.2498 trillion won, more than five times the 606.8 billion won in the same period last year, with nearly 1 trillion won added in just March alone, bringing the first-quarter results close to last year’s total net profit of 4.585 trillion won in the first half.

The financial situation of the Bank of Korea differs from that of ordinary companies, mainly influenced by the performance of foreign currency asset operations rather than product sales profits. The Bank of Korea invests foreign exchange reserves in foreign currency-denominated securities (such as bonds and other financial assets priced in US dollars and other foreign currencies), and the interest income and trading gains from these investments are core to its performance. In the first quarter of this year, the high exchange rate trend, with the average won-to-dollar rate exceeding 1,460 won, persisted and is interpreted as leading to increased gains and losses from foreign currency securities trading and interest from overseas asset operations. The Bank of Korea also explained that the sustained high exchange rate has driven up the returns related to foreign currency securities.

Additionally, gains from foreign exchange trading during stabilization measures in the foreign exchange market and the decline in interest rates on currency stabilization bonds also contributed to the improvement in earnings. Currency stabilization bonds are securities issued by the Bank of Korea to regulate market liquidity, and a decrease in their interest rates means the bank’s interest costs have also decreased. Since January 2023, the Bank of Korea has included estimated values of interest receivable, expenses payable, and corporate taxes in its monthly balance sheet compilation, making recent data more detailed in reflecting gains and losses.

This trend has continued from last year into this year. The Bank of Korea’s net profit last year reached 15.3275 trillion won, nearly doubling from 7.8189 trillion won the previous year, setting a record high, with 10.705 trillion won paid as government fiscal revenue. The Bank of Korea allocates 30% of its net profit to statutory reserves, with part of it designated as voluntary reserves, and the remaining amount paid to the government. Going forward, fluctuations in the bank’s gains and losses may increase depending on exchange rates, overseas interest rates, and the scale of foreign exchange market interventions; if high exchange rates persist, book gains may increase, but this could also be a result of market instability.