Barley Break Approaches This Year... Financial Holding Companies Can't Smile Even During the 'Earnings Season'

Hana Financial's Last Year's Net Profit Increased 7.8% to 2.4 Trillion Won in One Year
Shinhan, KB, Woori Financial Also Likely to Achieve Record High Performance
Government Regulation Tightening and Larger-than-Expected NIM Decline Raise Red Flags

[Asia Economy Reporter Kangwook Cho] Starting with Hana Financial Group, the earnings announcements of domestic financial holding companies have begun. Like Hana Financial, which set a record for the highest-ever performance, other financial holding companies such as Shinhan, KB, and Woori are also expected to announce 'record-breaking' results. However, concerns are growing that this year will not be easy. Amid domestic demand contraction caused by the impact of the novel coronavirus infection (Wuhan pneumonia), along with the government's strengthened regulations on real estate and financial investment products, and pessimistic forecasts that the decline in banks' net interest margin (NIM) this year will be greater than initially expected, the sector appears to be facing its greatest crisis.

According to the financial sector on the 5th, Hana Financial announced in its earnings report the previous day that its net profit last year was 2.4084 trillion KRW. This figure represents a 7.8% (175 billion KRW) increase compared to the previous year and is the highest performance since the holding company was established in December 2005. After surpassing 2 trillion KRW in annual net profit in 2017, it has achieved net profits in the 2 trillion KRW range for three consecutive years. This was influenced by Hana Bank recording a net profit of 2.1565 trillion KRW, the highest ever since the integrated bank's launch in 2015, based on interest income of 5.414 trillion KRW last year.

The results were lower than market expectations. Although a one-time gain of 228.6 billion KRW occurred related to the acquisition of shares in the Vietnam Investment and Development Bank (BIDV), the provision for overseas interest rate-linked derivative-linked funds (DLF) reached 159.5 billion KRW, much higher than the initially expected 40 billion KRW, and a lease loss of 171.3 billion KRW related to China Minsheng Investment Group was reflected. However, it is evaluated that by proactively addressing uncertainties early, the remaining cost-related uncertainties this year are limited to foreign exchange derivative products KIKO.

Starting with Hana Financial, Shinhan Financial will announce its earnings this afternoon. On the 6th, KB Financial, and on the 7th, Woori Financial are scheduled to announce their results. The financial investment industry estimates that all of them have achieved record-high performances.

Shinhan Financial is expected to renew its record for the highest performance for the second consecutive year, following its re-entry into the '3 trillion KRW club' after seven years last year. Although about 100 billion KRW in voluntary retirement costs occurred in the fourth quarter, increased interest income from loan growth and the effect of incorporating Orange Life are expected to result in earnings that meet market forecasts. KB Financial is on the verge of joining the 3 trillion KRW club for the third consecutive year.

KB Financial surpassed Shinhan Financial for the first time since the adoption of International Financial Reporting Standards (IFRS) in 2012 by posting a net profit of 3.3119 trillion KRW in 2017. However, in 2018, due to increased one-time costs such as voluntary retirement expenses in the 200 billion KRW range, it lost the top spot back to Shinhan Financial. Last year, it is expected to fiercely compete with Shinhan Financial for ranking by recording the highest-ever performance. Attention is also focused on how much Woori Financial can narrow the gap with Hana Financial, supported by its earnings growth.

The problem starts now. This year, concerns about reduced bank earnings are high due to the annual decline in NIM, decreased interest income from slowed growth, and reduced product sales commission income. The government's strengthened real estate regulations are expected to slow the growth of mortgage loans. Additionally, the household loan balance of five major commercial banks last month was 611.395 trillion KRW, increasing by only 638.8 billion KRW from the previous month. This is the smallest increase in 2 years and 10 months since March 2017. If the impact of regulations on jeonse loans continues, the growth rate of household loans is expected to continue slowing. It is also uncertain whether corporate loans can be expanded amid domestic demand contraction and sluggish facility investment. Especially as the global economy is hit by the spread of the novel coronavirus, market interest rates have already turned downward. Amid various negative factors, concerns are raised that not only bank growth but also soundness could deteriorate due to domestic demand contraction.

There is even pessimism that the decline in NIM will be greater than expected. In a report following Hana Financial's earnings announcement, DB Financial Investment estimated that Hana Bank's NIM fell by 6 basis points to 1.41%, and considering one-time factors such as year-end delinquency recovery, it is presumed to have actually fallen below 1.4%.

Jung Joong-ho, head of Hana Financial Research Institute, said, "This year will be a turning point where all aspects of the banking sector?growth, profitability, and soundness?will deteriorate," and predicted, "The absolute scale of bank earnings will significantly decrease for the first time in five years."

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