"Worries Over Profitability Deterioration Amid Comprehensive Pressure from Regulation and Competition"... Warning Signals from Banks

Strengthening Loan Regulations, Industrial Diversification, and Warnings on 'Investment Risks'
Management Pressure Expected to Increase Due to Financial Consumer Protection Policies

[Asia Economy Reporter Kim Hyo-jin] Major commercial banks expect their profitability to significantly deteriorate this year due to comprehensive pressures such as various government loan regulations and diversification of the financial industry. They expressed concerns to investors, citing a challenging business environment including strengthened household loan regulations, a low interest rate trend, and deflation concerns.

According to the banking sector on the 6th, Shinhan Bank stated in its recently disclosed investment prospectus that "the slowdown in household debt growth may limit the profitability of domestic commercial banks." It cited the cumulative household loan increase of 33.3 trillion KRW as of the third quarter of last year, noting a slowdown compared to 2017 and 2018.

Shinhan Bank particularly anticipated that under the new loan-to-deposit ratio regulation, which raises the household loan risk weight by 15 percentage points and lowers the corporate loan risk weight by 15 percentage points, expanding loans to small and medium-sized enterprises (SMEs) that are highly affected by economic fluctuations could worsen the bank's profitability and soundness.

KB Kookmin Bank also expressed concerns that poor SME business conditions, worries about self-employed business failures, employment instability, and real estate regulations have increased the risk of household sector insolvency. It further analyzed that "there is concern over the expansion of credit losses among interest rate-sensitive vulnerable borrowers and the resulting slowdown in growth."

Woori Bank mentioned in the 'Investment Risk Factors' section of its investment prospectus the government's successive real estate-related loan regulation policies, including last year's '12.16 Real Estate Measures,' pointing out that these could act as factors limiting the bank's growth and profitability.

These banks also noted that the expansion of the fintech and internet-only banking industries, driven by the government's 4th Industrial Revolution policy, is emerging as a risk factor.

KB Kookmin Bank stated, "While the growth of the fintech industry creates opportunities for new financial services, it also allows non-financial companies to enter the market, exposing financial companies to a new financial environment." This, they said, could ultimately intensify competition within the banking and financial industries. The concept of a primary bank relationship is being diluted, competition with fintech companies is increasing, and profit declines are expected due to reductions in firm banking fees.

Woori Bank diagnosed that "negative factors may arise from the introduction of internet-only banks," adding, "While there may be positive effects such as cost reduction and promotion of product development by existing financial institutions, negative effects such as price competition and profitability decline may also occur." Shinhan Bank also foresaw that "it could further intensify competition within the financial industry."

According to the Financial Supervisory Service's 'Domestic Banks' 2019 Operating Performance (Preliminary)' data released the previous day, domestic banks' net income last year was 14.4 trillion KRW, a decrease of 1.2 trillion KRW (7.7%) compared to 2018. Although interest income increased, losses from investments in subsidiaries grew, resulting in a net income decline. A financial sector official explained, "This means it has become difficult to improve profitability by relying solely on traditional revenue sources."

With the 'Financial Consumer Protection Act (FCPA),' which applies the six major sales principles to all financial products, passing the National Assembly plenary session the previous day, financial consumer protection policies are increasingly being strengthened, and banks are expected to face greater pressure.

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