KakaoBank, South Korea’s largest internet-only lender, reported record profits for , but a closer look at its earnings reveals a growing reliance on housing loans and a shifting business landscape. As regulators tighten controls on household debt, the bank is increasingly focused on expanding its non-interest income streams and diversifying its loan portfolio, targeting mid- and low-credit borrowers and small business owners.
The bank’s operating profit reached 649.4 billion won ($448 million) in , a 7 percent increase from , while net profit climbed 9.1 percent to 480.3 billion won. However, this growth was driven by a surge in non-interest income, which rose 22.4 percent year-over-year to 1.09 trillion won, surpassing the 1 trillion won mark for the first time. This now accounts for more than 35 percent of the bank’s total operating revenue.
Despite the overall positive results, KakaoBank’s net interest margin (NIM) has been under pressure, standing at 1.94 percent, a slight increase from the previous quarter but down from 2.15 percent in the same period of the prior year. The net interest spread (NIS) also declined, falling from 2.50 percent to 2.34 percent. This reflects the bank’s strategy of increasing its portfolio of lower-margin loans, such as those offered through government programs like the Bojeomjari Loan and policy-backed mortgages.
As of the end of , housing loans, including policy mortgages, totaled 14.541 trillion won, a 15 percent increase from the previous year, and now represent 31 percent of the bank’s total loan portfolio. The bank’s total loan outstanding reached 46.9 trillion won, while deposits grew to 68.3 trillion won, an increase of 13.3 trillion won.
KakaoBank has been actively increasing its lending to mid- and low-credit borrowers, allocating 49.4 percent of its unsecured personal loans to this segment in the first half of . The bank supplied an additional 1 trillion won in loans to these borrowers using alternative credit assessment models. However, its loan portfolio remains heavily weighted towards higher-quality borrowers, with a significant portion still comprised of loans to individuals with strong credit histories.
The shift towards non-interest income is a key part of KakaoBank’s strategy to mitigate the impact of a challenging interest rate environment and regulatory pressure to reduce household lending. Fee- and platform-related revenue increased by 2.9 percent to 310.5 billion won, driven by growth in loan and investment platforms and higher advertising income. The bank is also exploring alternative investments, including venture capital and international joint ventures, establishing a dedicated division within its financial management team to evaluate these opportunities. Rival Toss Bank is also exploring alternative investments through asset-backed securities.
KakaoBank’s customer base continues to expand, reaching 26.7 million users at the end of , with 1.82 million new customers added during the year. Monthly active users (MAU) exceeded 20 million.
However, the bank faces headwinds from government policies aimed at curbing household debt. Financial regulators have been closely monitoring internet banks’ lending practices and are seeking to prevent them from circumventing regulations through aggressive interest rate cuts or loan growth. The government’s measures to manage household debt have led to a slowdown in bank lending growth, and KakaoBank is expected to face similar constraints.
To navigate this environment, KakaoBank is focusing on expanding its lending to small business owners (SOHO) and leveraging its platform to generate non-interest income. The bank’s personal business loan balance increased significantly, from 783 billion won in to 3.55 trillion won at the end of , outpacing the decline in lending by traditional banks. The bank aims to increase advertising revenue by over 30 percent in and grow fee and platform revenue by 20 percent through expansion of its investment and payment services.
KakaoBank’s ability to successfully transition to a more diversified business model will be crucial for its long-term growth. The bank must balance its commitment to inclusive finance with the need to maintain profitability and manage risk in a challenging regulatory environment. The bank’s capital adequacy ratios remain strong, with a BIS ratio of 23.15 percent and a CET1 ratio of 22.03 percent, providing it with flexibility to pursue its strategic objectives.
