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The Korea Development Bank (KDB), the state-run lender now up for privatization, had the worst performance in overseas business this year, with its net profit halving to $24.6 million in the first half year-on-year.

The setback is standing out as many commercial banks, such as Shinhan and the Korea Exchange Bank (KEB), enjoyed robust profit growth abroad.

In a report on banks’ first-half overseas performance, the Financial Supervisory Service (FSS) said that KDB posted a net profit of $24.6 million between January and June, down $17.5 million from a year ago, the largest drop among nine local banks.

The poor performance was due to its high exposure to overseas subprime mortgages caused by poor risk management.

“Among the nine lenders, KDB and the Industrial Bank of Korea (IBK) have heavy exposure to subprime mortgages in Hong Kong, Singapore and London. That is the key reason why they suffered a sharp fall in net profits,” an FSS official said.

The KDB’s overseas business outcome is particularly disappointing as it came in the midst of its new head showing his ambition to transform the state bank into a world-class global investment bank.

In an investors relation session held in New York in June, President Min Euoo-sung unveiled his vision to change the KDB into a global investment bank, saying, “KDB will make all-out efforts to gain a strong foothold in Asian markets by developing new revenue sources in areas of project financing and M&A.”

The state-run lender’s recent move to purchase a stake in Lehman Brothers, the fourth largest U.S. investment bank battered by subprime mortgage meltdown, is in line with Min’s vision and strategy. Negotiations between the two parties, however, ruptured due to price issues.

IBK is another big loser. It posted a net profit of $3.8 million in the first half, down $9.6 million from a year earlier, while Koomin and Woori also saw their net incomes decrease by $1.1 million and $0.3 million respectively during the same period.

In contrast, Shinhan enjoyed the biggest profit growth, with its net income reaching $51.8 million in the first half, up $11.9 million from a year before. KEB and Hana also witnessed their net profits grow by $10.6 million and $9.5 million, respectively, to $74.3 million and $29.3 million.

“With current staff and risk management skills, it is hard for Korean banks to make a big success abroad,” the head of a local consulting firm said on condition of anonymity.

“Lack of talented staff and poor risk management are the two key reasons for the poor performance,” he said. “They should make further efforts to improve these areas to be a true global player.”

Overall, profitability for nine Korean banks’ 120 overseas units operating in 31 countries deteriorated in the first half, as they expanded their assets abroad, while their profits grew at a snail’s pace.

According to the report, Korean banks saw their earnings from overseas operations rise 1.4 percent in the first half from a year ago on the back of an increase in operating income.

The combined net profit of 120 overseas operations reached $253.9 million for the first six months, slightly up from $250.3 million a year earlier.

“The stronger bottom line came as their operating profit rose on the back of higher interest income,” another FSS official said. The combined interest income increased by $102.8 million year-on-year to $398.9 million.

Their total assets amounted to $53 billion as of the end of June, up from $46.7 billion at the end of last year and $34.35 billion at the end of 2006.

As a result, their return on assets (ROA) averaged 0.7 percent in the first half, sharply down from 1.31 percent a year ago.

The regulator said it will beef up its monitoring of local banks’ overseas operations as they become increasingly exposed to external shocks triggered by a global economic downturn and the renewed U.S. credit crisis.

Among the nine lenders, KEB has the biggest overseas operation with 27 business units, followed by Woori with 18, Export-Import Bank of Korea with 17 and KDB 15.

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