PREVIEW-S.Korea KB Fin Q3 may fall; other banks to shine

* What: KB Financial, Shinhan, Samsung Sec July-Sept results

* When: Oct 23 - Oct 30

* Lending margins recover; provision costs weigh

* M&A to be catalyst for 2010: KEB and Woori may be eyed

* Hana may announce rights offer

By Kim Yeon-hee

SEOUL, OCT 23 (Reuters) - KB Financial Group (105560.KS) may report quarterly profits were almost halved due to provisioning costs for bad loans, but earnings at other South Korean banks are likely to rise on a strong pickup in interest margins.

Market interest rates turned higher from the third quarter, boosting interest incomes at banks. Growing expectations are for a rise in policy rates to lift lenders' interest margins further, as government stimulus packages come to an end and signs of asset price bubbles emerge.

"Improvement in net interest margins will continue in the era when interest rates are on the rise," said Sung Byung-soo, a banking analyst of Prudential Investment & Securities.

Analysts said the year ahead could also see South Korea's banking sector faced with a shake-up, with the government set to shed part of its 73 percent stake in Woori Finance Holdings (053000.KS), South Korea's No. 3 banking group. U.S. private equity house Lone Star [LS.UL] is also gearing up to put its 51 percent of sixth-ranked Korea Exchange Bank (004940.KS) up for sale, according to an industry source.

"M&A issues will also become a catalyst to upgrade banks' valuations with discussions about the privatisation of Woori Finance and the sale of Korea Exchange Bank to intensify," Sung said.

Fourth-ranked Hana Financial Group (086790.KS) may announce a rights offering plan when it reports third-quarter results on Friday, after it said earlier this month it might raise capital in a new share sale.

Local media estimated the size of Hana's rights offering at up to 2 trillion won, and said it could be used to fund its bidding for a domestic rival.[ID:nSEO95311]

INTEREST MARGINS UP

Net interest margins (NIM), which make up 70 percent of local banks' earnings, are estimated have risen between 10 and 20 basis points in the third quarter from three months before, analysts say, after 50-70 basis point drop in the first half of this year.

Higher-yielding deposit products with 6-7 percent rates, which South Korean banks had to sell late last year to fill a funding shortage, have been maturing in the second half. Banks now are replacing them with 3-4 percent rate products.