Volatile Foreign Exchange Market Contributed to BOK's Second Highest Ever Net Profit [BOK Focus]

Most Earnings from Foreign Currency Asset Management
Booming Overseas Stock Markets and High Exchange Rates Boost Profits
Increased Volatility in the Foreign Exchange Market
Dollar Sales for Market Intervention Yield 1.1654 Trillion KRW in Trading Gains

'7.8189 trillion KRW. Last year’s net income recorded on the Bank of Korea’s report card. It is the second-largest amount ever, close to the record high of 7.8638 trillion KRW in 2021. Pre-tax profit, before considering corporate taxes, exceeded 10 trillion KRW (10.3972 trillion KRW). How was such a figure possible? Why did the increased volatility in the foreign exchange market last year, which confused market participants, ultimately contribute to the Bank of Korea’s net income growth?

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Most Earnings from Foreign Currency Asset Management... Last Year’s US Stock Trading Gains Up, Foreign Currency Bond Interest Up

Most of the Bank of Korea’s profits come from managing foreign currency assets. The second-highest net income record indicates that foreign currency asset management was well executed last year. The Bank of Korea stated that the increase in total revenue, mainly from securities trading gains and securities interest, had the greatest impact on the rise in net income. Due to the boom in overseas stock markets such as the US, foreign currency stock trading gains surged, and with prolonged high interest rates, interest from foreign currency bonds also increased. Last year, securities trading gains (8.3172 trillion KRW) rose by 3.5663 trillion KRW compared to the previous year. Securities interest also increased by 2.6121 trillion KRW compared to 2023, reaching 11.5933 trillion KRW.

The increased volatility in the foreign exchange market also ultimately contributed to the Bank of Korea’s net income growth. Last year, as the dollar’s value surged sharply in a short period, causing fluctuations in the foreign exchange market, the Bank of Korea intervened by selling dollars to reduce volatility. Because the won-dollar exchange rate was high, the Bank sold dollars to supply dollars to the market, resulting in significant gains. Last year, the Bank of Korea’s foreign exchange trading gains amounted to 1.1654 trillion KRW, an increase of 199.9 billion KRW compared to the previous year. A Bank of Korea official explained, "Since we follow the cost method, the amount when selling last year was much higher than the purchase amount, resulting in substantial profits."

Operating revenue, including securities trading gains, securities interest, and foreign exchange trading gains, was 26.4741 trillion KRW, an increase of 7.1481 trillion KRW compared to 2023. Total revenue, including non-operating income (43.9 billion KRW), was recorded at 26.5179 trillion KRW. On the other hand, operating expenses decreased by 825.7 billion KRW in securities trading losses, totaling 16.115 trillion KRW, down 1.4403 trillion KRW from 2023. Total expenses were 16.1208 trillion KRW.

Corporate Tax Payment of 2.5782 Trillion KRW... Reserves Below 5% of Total Assets

The Bank of Korea paid 2.5782 trillion KRW in corporate taxes. This is the third-largest amount ever, following 2.8776 trillion KRW in 2021 and 2.8231 trillion KRW in 2020. The corporate tax payment exceeded 2 trillion KRW for the first time in 2019 (2.0441 trillion KRW) and has remained above 2 trillion KRW for three consecutive years. However, since 2022, profits have sharply declined due to increased interest on monetary stabilization bonds caused by rising interest rates and falling bond prices and stock prices.

The Bank of Korea allocated 30% of net income, 2.3457 trillion KRW, to statutory reserves. The reserve balance stands at 22.8923 trillion KRW, which is 3.84% of last year’s total assets (595.5204 trillion KRW). This is still below the Bank of Korea’s target reserve level of 5% of total assets. Excluding the discretionary reserve of 24.1 billion KRW for the Agricultural and Fishery Household Savings Encouragement Fund, the Bank’s surplus of 54.491 trillion KRW is paid as government revenue. A Bank of Korea official said, "The Bank’s surplus is about 1.2 trillion KRW more than the government’s initial estimate of 4.2 trillion KRW."

As of the end of last year, the Bank of Korea’s total assets of 595.5204 trillion KRW increased by 59.1185 trillion KRW compared to the end of the previous year (536.4019 trillion KRW). This was due to the increase in the won-converted value of foreign currency assets caused by the exchange rate rise. Liabilities (567.1549 trillion KRW) also increased by 52.2531 trillion KRW due to foreign exchange valuation adjustments from the exchange rate rise.

Dollar Share Increased and Entrusted Assets Expanded to About 25%

As of the end of last year, foreign exchange reserves stood at 415.6 billion USD, down 4.5 billion USD from the end of 2023. Among these, excluding the International Monetary Fund (IMF) position, gold, and Special Drawing Rights, the share of dollar-denominated assets was 71.9% as of the end of last year, accounting for the majority. This is a 1.0 percentage point increase compared to 70.9% at the end of 2023. The US dollar share expanded due to the strong US dollar supported by a solid US economic trend and political uncertainties in major countries. The composition by product was government bonds 47.3%, government agency bonds 10.1%, corporate bonds 10.4%, asset-backed securities 11.6%, and stocks 10.2%. A Bank of Korea official explained, "Given the high volatility in domestic and international financial markets, we have focused on liquidity and safety, which led to an increased share of government bonds."

The Bank of Korea manages foreign currency assets by dividing them into cash-equivalent assets and investment assets according to management purposes. Investment assets are further divided into direct investment assets and entrusted assets based on management methods. As of the end of last year, cash-equivalent assets accounted for 8.0%, up 0.7 percentage points from the previous year. This level is maintained higher than before the COVID-19 crisis to respond to frequent inflows and outflows of foreign currency funds. Direct investment assets, which have the largest share and mainly consist of bonds, accounted for 67.2%, down 1.3 percentage points from the previous year. Entrusted assets, managed by domestic and foreign asset management companies and the Korea Investment Corporation (KIC), increased by 0.6 percentage points to 24.9%.

The number and scale of domestic entrusted asset management companies remained the same as the previous year. A total of five companies manage Chinese stocks (590 million USD), developed country stocks (1.75 billion USD), and developed country bonds (700 million USD), totaling 3.04 billion USD. The Bank of Korea plans to gradually expand the use of domestic financial institutions while reviewing their asset management capabilities and entrusted conditions. Meanwhile, last year, for the first time, the Bank signed cross-currency transactions worth 370 million USD with four domestic banks (transactions between foreign currencies not involving the won). This is part of strengthening the competitiveness of domestic banks in line with the foreign exchange market structure improvement. A Bank of Korea official said, "Since transactions started for the first time in September last year, the volume was not large," adding, "We will expand the scale depending on transaction capabilities."