New Coronavirus, DLF and KIKO Compensation in the Hundreds of Billions... A Harsh February for the Financial Sector (Comprehensive)

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

On the 3rd, as concerns over the spread of the novel coronavirus infection grow, the lobby of COEX in Gangnam-gu, Seoul is quieter than usual. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Jo Gang-wook] The spread of the novel coronavirus infection (Wuhan pneumonia) has coincided with 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 over management gaps, and a 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, which was 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 visitor numbers. Bank branch employees are already wearing masks to greet customers, and customer-use hand sanitizers, masks, and contactless thermometers have been placed in the lobbies. Disinfection and sterilization measures 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 of branches frequently visited by Chinese customers, following the headquarters and other branches.

Local subsidiaries and branches in China have entered forced closures. Additionally, they are considering extending telecommuting measures for Korean employees. Industrial Bank of Korea, the only bank with a branch in Wuhan in Korea, has already repatriated all two Korean employees.

Furthermore, banks have collectively decided to provide emergency funds and interest reductions to companies and individuals affected by the novel coronavirus.

KB Kookmin Bank will support small and medium-sized enterprises (SMEs) engaged in tourism, travel, accommodation, performance, and dining industries that are temporarily facing difficulties due to decreased overseas travel demand or group reservation cancellations. For companies needing emergency operating funds, new loans up to 500 million KRW per company within the damage scale will be supported, along with preferential interest rate benefits of up to 1.0 percentage point.

Woori Bank will also provide special funds worth 100 billion KRW starting from the 3rd for SMEs and small business owners expected to be affected by the novel coronavirus. Shinhan Bank plans to significantly increase the scale of new loans to affected SMEs. It will defer repayment schedules of existing loans and reduce interest rates by up to 1.0 percentage point for deferrals and refinancing.

Hana Bank will provide emergency management stabilization funds up to 300 billion KRW in total, with up to 500 million KRW per company, to corporate customers such as SMEs and sole proprietors in travel, accommodation, and restaurant industries. NH NongHyup Bank will provide financial support to affected individuals and SMEs until June 30 (tentative). Companies can receive new funds up to 500 million KRW, and individuals up to 100 million KRW, with loan interest rate reductions up to 1.00% (up to 1.70% for farmers) and interest payment deferrals for up to 12 months.

Regional banks have prepared similar support measures. BNK Busan Bank will newly support emergency management stabilization funds totaling 100 billion KRW, with up to 500 million KRW per company. Gyeongnam Bank will provide emergency funds up to 500 million KRW to confirmed affected companies, along with interest rate reductions up to 1.0 percentage point. Gwangju Bank will inject emergency management stabilization funds totaling 100 billion KRW (50 billion KRW for new support and 50 billion KRW for maturity extension) with a limit of 500 million KRW for self-employed and SMEs in accommodation and food service industries.

Amid overall contraction in business due to concerns about the novel coronavirus, 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 has settled with 466 out of 661 customers subject to DLF compensation, accounting for 70.5%, and paid 26.7 billion KRW in compensation. Hana Bank, which has completed about 40% of voluntary compensation, plans to set aside provisions related to DLF. Since the maturity of products will sequentially arrive from September this year, this is interpreted as considering potential losses. In this regard, the Financial Dispute Mediation Committee decided last month on an unprecedented highest compensation rate of 80%, holding the bank headquarters responsible.

Compensation related to the foreign exchange derivative product 'KIKO', which caused significant losses to SMEs 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. Korea Citibank and Woori Bank are reported to be at approximately 40 billion KRW and 20 billion KRW, respectively. Meanwhile, 16 banks and securities firms that sold Lime funds have formed a joint response team and maintain that the possibility of incomplete sales is low, but financial authorities plan to hold these sellers accountable depending on the results of on-site inspections.

With the market environment contraction this year inevitably worsening profitability, 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." He 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 additional decline in profits related to the non-interest sector."

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