Top South Korean lender Kookmin Bank posted a bigger-than-expected 14 percent rise in quarterly profit on Monday as it sold a stake sale in an insurance venture with ING Groep, but forecast a tough year ahead and a squeeze on margins.

Retail-banking focused Kookmin, which is preparing to adopt a holding company format, has been hit hard by stalled deposit growth as depositors flocked to higher-yielding accounts offered by brokerages.

Increased competition forced Kookmin to issue bonds to finance lending, sending its net interest margin -- the difference between interest income from its lending and interest paid on borrowings -- lower as the cost of credit rose in the wake of the U.S. subprime crisis

Rising interest rates in Korea in July and August to a six-year peak also weighed.

Commercial banks in 2008 are likely to face more difficulty in doing business than this year, Kookmin CEO Kang Chung-won told a conference call after its quarterly results.

Despite the sombre outlook, he stuck by his previous statement that the bank would return 30 percent of 2007 earnings to shareholders as dividends.

Chief Financial Officer Kap Shin added that the bank would remain under pressure with softer interest margins, but was still aiming to expand its existing business by 7-8 percent next year, in line with the rest of the industry. Kookmin, which numbers half of South Korea's 48 million population among its customers, earned 775 billion won ($853.4 million) in the July-September period, above a 732.2 billion won forecast by a Reuters survey of 10 analysts.

The results compared with 678.1 billion won a year ago and 236.3 billion won three months before when it booked heavy back taxes which the bank planned to challenge.

In September, Kookmin sold a 5.1 percent stake in a life insurance unit of ING Groep back to the Dutch group to comply with domestic rules, which earned the bank 161 billion won pre-tax.

Without the proceeds from the stake sale, earnings at Kookmin would have come in at 614 billion won, below the year-ago figure.

Total lending in the won currency rose 14 percent to 147 trillion won from a year ago, compared with a 12 percent rise in the second quarter.

For the whole of this year, the bank is projected to earn a 2.87 trillion won net profit, up 16 percent from last year's 2.47 trillion won.

Shares in Kookmin closed 4.03 percent higher at 77,400 won, with the results announcement coming just as the market was closing at 0600 GMT. Investors returned to the underperforming sector, attracted by their low valuations, analysts said of the sector's advance on Monday.

STEEPER MARGIN DROP

Kookmin's net interest margin (NIM), an important measure of its profitability, fell sharply to 3.33 percent at the end of September from 3.48 percent three months before, at a steeper rate than the second quarter's fall by 12 basis points.

To make up for declining lending margins, Kookmin and other local banks are shifting their focus to brokerage and non-banking financial services, as well as overseas expansion.

Kookmin is expected to be under pressure from stiff competition from other banks and securities firms, said Simon Bae, an analyst at Dongbu Securities.

Kookmin, which has only a banking business, needs to show signs of making inroads into other businesses. Its NIM is unlikely to improve significantly soon.

CEO Kang said he expected to acquire a domestic brokerage or apply for a licence to set up its own brokerage within 2007, and could look at other non-banking business opportunities. He did not elaborate.

Non-interest income shrank 11 percent in the quarter from a year earlier, although interest income expanded by 3.4 percent, faster than the second quarter's 1.8 percent rise.

Shin said higher market interest rates following the U.S. subprime mortgage crisis had had an impact on its tradeable securities, slashing the non-interest income, but said the segment will stage a recovery in coming quarters.

Kookmin shares, with a market value of 25 trillion won

($27.36 billion), fell 6 percent in the July-September quarter, lagging the wider market's 11.6 percent gain.

South Korea Investment