Major Commercial Banks Warn of Profitability Decline Due to Intensified Regulation and Competition (Comprehensive)

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 forecasted that under the new loan-to-deposit ratio regulation, which raises the risk weight of household loans by 15 percentage points and lowers that of corporate loans by 15 percentage points, expanding loans to small and medium-sized enterprises (SMEs) that are highly sensitive to economic fluctuations could worsen banks' 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 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 that the government's successive real estate-related loan regulation policies, including last year's 'December 16 Real Estate Measures,' 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, in turn, could intensify competition within the banking and financial industries. The concept of a primary bank relationship is expected to weaken, competition with fintech companies will increase, and profits may decline due to reductions in firm banking fees.

Woori Bank diagnosed that "negative factors may arise from the introduction of internet-only banks," while also noting that "there could be positive effects such as cost reduction and promotion of product development by existing financial institutions, but negative effects like price competition and profitability decline may also occur." Shinhan Bank also anticipated 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 day before, domestic banks' net income last year was 14.4 trillion KRW, down 1.2 trillion KRW (7.7%) compared to 2018. Although interest income increased, losses from investments in subsidiaries grew, resulting in a decrease in net income. 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 conduct principles to all financial products, passing the National Assembly plenary session the day before, financial consumer protection policies are expected to strengthen further, increasing pressure on banks.

The law also includes provisions for punitive fines of up to 50% of income if obligations to explain and prohibitions on unfair solicitation are violated. Additionally, a new 'right to demand contract termination for illegal contracts' allows consumers to request contract termination from financial companies within a certain period if sales regulations are breached.

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