"Record High Performance..."... 'Bittersweet' Financial Holding Companies Worrying About the Boritgogae (Comprehensive)

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 Regulations Tighten and NIM Decline Larger Than Expected 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’s situation 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 industry appears to be facing its greatest crisis.

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

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

Shinhan Financial is expected to renew its record-high performance for the second consecutive year, following its re-entry into the '3 trillion won club' after seven years last year. Although about 100 billion won 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 track to join the 3 trillion won 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 won in 2017. However, in 2018, it lost the top spot again to Shinhan Financial due to increased one-time costs such as voluntary retirement expenses in the 200 billion won range. Last year, it is expected to fiercely compete with Shinhan Financial for ranking by recording its 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 decline in annual 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. In addition, the household loan balance of five major commercial banks last month increased by only 638.8 billion won to 611.395 trillion won compared to 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 pace of household loan growth is expected to further slow. 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 domestic demand contraction could worsen not only bank growth but also asset quality.

Jae-woo Kim, a researcher at Samsung Securities, pointed out, "If semi-jeonse and monthly rent increase, tenant living costs will rise, which may shrink domestic consumption. This could lead to reduced income for self-employed individuals and deterioration in the credit quality of self-employed loans, which have recently started to see rising delinquency rates."

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 recoveries, it likely fell below 1.4%.

Byung-geon Lee, a researcher at DB Financial Investment, said, "Even if the current level of NIM is maintained, this year’s NIM will fall by nearly 10 basis points compared to last year’s annual NIM of 1.49%, reflecting a steeper decline than expected," adding, "The decline in NIM this year will be greater than the initially estimated 7 to 8 basis points."

The Hana Financial Research Institute predicted that due to low growth and low interest rates, growth across the financial industry will slow and profitability will deteriorate this year. It also forecasted that the government’s strong loan regulations will suppress growth in the banking sector by reducing loan growth.

Jung Joong-ho, head of Hana Financial Management 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.