New Coronavirus, DLF, Lime, and KIKO Compensation... A Harsh February for the Financial Sector

Emergency Response Team and Other Emergency Systems
Forced Shutdown of Chinese Subsidiary Also Implemented
Management Vacuum and Sales Contraction Inevitable

[Asia Economy Reporter Jo Gang-wook] The spread of the novel coronavirus infection (Wuhan pneumonia), overseas interest rate-linked derivative-linked funds (DLF), the Lime incident, and KIKO compensation. Amid a low interest rate and low growth trend, February is expected to be a challenging period for the financial sector as consumer compensation, concerns about management gaps, and contraction in financial product sales overlap.

According to the financial sector on the 3rd, major commercial banks have established emergency systems by operating emergency response committees and comprehensive situation teams related to the novel coronavirus. In particular, they have adjusted their own meeting schedules and postponed official events.

Shinhan Bank converted the global management strategy meeting scheduled to be held at its headquarters early this month into a video conference. This meeting involves all overseas corporate heads and branch managers. KB Kookmin Bank postponed seminars for customers, marketing group events, and employee group training schedules.

Among the branches of major commercial banks, branches with usually high customer visits such as Gangnam Station branch and Ansan Wongok-dong branch, which is frequented by many Chinese customers, have seen a significant decrease in customer visits. Bank branch employees are already wearing masks to greet customers, and customer-use hand sanitizers, masks, and contactless thermometers have been placed in the lobby. Disinfection and sterilization have also been strengthened. NongHyup Bank will conduct disinfection work not only at all 1,134 branches nationwide but also at ATMs and restrooms until the 14th of next month. Shinhan Bank recently hired an external professional company to disinfect the entire premises, including the headquarters, branches, and branches frequently visited by Chinese customers.

Local subsidiaries and branches in China have entered forced closure. In addition, they are reviewing the extension of telecommuting measures for Korean employees. Industrial Bank of Korea, the only domestic bank with a branch in Wuhan, has already repatriated all two Korean employees.

With concerns about the novel coronavirus causing an overall contraction in business, large banks have had to pay astronomical compensation amounts due to incomplete sales of various financial products. As of the 30th of last month, Woori Bank reached agreements with 466 customers, accounting for 70.5% of the 661 customers eligible for DLF compensation, and paid 26.7 billion KRW in compensation. Hana Bank, which has completed about 40% of voluntary compensation, decided to set aside provisions related to DLF. Since the maturity of the products will sequentially arrive from September this year, it is interpreted as considering the possibility of losses. In this regard, the Financial Dispute Mediation Committee decided last month on the highest-ever compensation rate of 80%, holding the bank headquarters responsible.

Compensation related to the foreign exchange derivative product 'KIKO', which caused significant losses to small and medium-sized enterprises during the 2008 financial crisis, is also an issue. Shinhan Bank's total compensation amount reaches 55 billion KRW, and Hana Bank's total compensation is 40 billion KRW. It is reported that Citibank Korea and Woori Bank are at about 40 billion KRW and 20 billion KRW, respectively. In addition, 16 banks and securities firms that sold Lime funds have formed a joint response team and claim that the possibility of incomplete sales is low, but financial authorities plan to hold these sellers accountable depending on the results of the due diligence.

With the market environment contraction this year making profitability deterioration inevitable, Woori Bank and Hana Bank are expected to face management gaps due to severe disciplinary actions against executives, and some operations will be suspended for six months, along with fines, worsening the situation further. Shinhan Bank is already known to have lowered its net profit target for this year by about 10% compared to last year.

Jo Boram, a researcher at NH Investment & Securities, said, "Regarding the DLF incident, severe disciplinary actions were taken against the bank executives, which may cause short-term deterioration in investment sentiment toward governance," adding, "Minimizing related noise and appropriate and prompt follow-up measures regarding management gaps will be important for mid- to long-term stock price stabilization." She further diagnosed, "The loss scale related to the six-month partial suspension of operations and fines can be identified after regular meetings, but there is a possibility of further decline in profits related to the non-interest sector."

This content was produced with the assistance of AI translation services.