The Bank of Korea to Give 5 Major Banks 1 Trillion Won in Net Profit to Big Cut

Domino Collapse Risk Including Hankeigeop
Concerns Over Asset Soundness Deterioration
Banks Prepare Contingency Plans for Worst-Case Scenario

[Asia Economy reporters Kangwook Cho, Eunbyeol Kim, Haeyoung Kwon] The unprecedented era of zero (0) interest rates has triggered red alerts for profitability management in the banking sector. As the net interest margin (NIM), a core profitability indicator of commercial banks, deteriorates, each bank faces the risk of losing several hundred billion won in net income this year. With the prolonged COVID-19 pandemic raising concerns about a possible 'domino collapse' of financially vulnerable marginal companies and low-income households, worries about the deterioration of asset quality in the banking sector are also growing. There is even a possibility that if the real economy shock spreads to the financial sector, a financial crisis could occur.

According to the financial sector on the 17th, it is forecasted that the total net income of the five major domestic commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?will decrease by more than 1 trillion won this year. Typically, when the base interest rate is lowered by 0.25 percentage points, an individual bank's annual net income is estimated to decrease by 100 billion won. This year, following the Bank of Korea's big cut (a large-scale interest rate cut) yesterday, it is analyzed that a net income decrease of more than 200 billion won per large commercial bank has become inevitable.

Since last year, after two base rate cuts, the low-interest rate trend has continued, causing the NIM of domestic banks to steadily decline. According to the Financial Supervisory Service, the overall NIM of the domestic banking sector slightly increased from 1.63% at the end of 2017 to 1.67% at the end of 2018 but dropped sharply by 11 basis points to 1.56% at the end of last year. As of the end of last year, Shinhan Bank and Hana Bank saw a 15 basis point decrease compared to a year earlier, Woori Bank 14 basis points, and Kookmin Bank 9 basis points. Due to the COVID-19 situation and the base rate cut, the NIM decline in the first quarter of this year is expected to widen further, dropping by more than 3 to 4 basis points. Shinhan Investment Corp. forecasts that the annual NIM of the banking sector will decrease by about 7 basis points, and pre-tax profits will decline by 5.5%.

The '0% range' for fixed deposits is also entering the countdown. Most fixed deposit interest rates are already stuck in the 1% range. According to the Bank of Korea, as of the end of January, the proportion of fixed deposits in deposit banks with interest rates below 2% reached 98.7%. In particular, for fixed deposits with a maturity of less than six months based on new contracts, the deposit interest rate recorded an all-time low of 1.38%.

The problem is that there are no suitable cards to prevent such profitability deterioration. The government's ultra-strong loan regulations have put brakes on loan growth for banks, and non-interest income has also been hit due to incidents like the overseas interest rate-linked derivative-linked funds (DLF) and Lime Asset Management scandals. In fact, the average loan growth rate of banks was in the 7-8% range until last year but is expected to shrink to the 4% range over the next three years from this year to 2022. Due to the COVID-19 pandemic, investment and employment by large corporations have contracted, making a decrease in loan demand inevitable.

Concerns are also raised that the risk of mass bankruptcies among self-employed individuals and small and medium-sized enterprises (SMEs) could become a 'time bomb' for our economy. There are warnings that the rapid increase in defaults, especially among frontline self-employed workers hit hard by COVID-19 in sectors such as food service, lodging, and retail, could lead to loan delinquencies in financial institutions. According to the Financial Supervisory Service, the delinquency rate on won-denominated loans (based on principal and interest overdue for more than one month) at domestic banks was 0.41% at the end of January, up 0.04 percentage points from the end of the previous month. Considering that concerns about the domestic economy intensified in February, the delinquency rate is likely to weaken further.

Provisions for loan losses that banks set aside in preparation for loan defaults are also expected to increase. Hana Financial Investment estimates that the loan loss provisions for Shinhan, KB, Hana, and Woori Financial Group this year will reach 3.685 trillion won, a 50.8% increase compared to the average of the past three years (2.4437 trillion won).

Banks have entered an emergency management system. Since the 'big cut' in the base interest rate indicates a worsening economic situation, they are assuming the worst-case scenario and seeking future response measures.

A senior official at a commercial bank said, "We are conducting stress tests by setting the worst-case scenarios and examining the impact on bank profits. The problem is not profits but concerns about future defaults. Currently, it is impossible to gauge how far corporate and self-employed loan defaults will spread and the shock they will cause."

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