Financial Holding Companies' Net Profit Expected to Plunge 23%... COVID-19 Financial Shock Becomes Reality

KB, Shinhan and 6 Other Holding Companies
Consolidated Net Profit Expected at 10.6 Trillion Won
21% Lower Than Market Estimates

Impact of Decline in Non-Interest Income and NIM
Deterioration in Asset Quality
Moody's Issues 'Increased Risk' Warning

[Asia Economy Reporter Kangwook Cho] Due to the impact of the novel coronavirus disease (COVID-19) crisis, it is forecasted that the net profits of financial holding companies will plummet by more than 20% this year. International credit rating agency Moody's has raised warnings regarding domestic banks and insurance companies with high concerns over asset quality deterioration. The COVID-19-induced economic crisis, which began with a downturn in the real economy, is now materializing in the financial sector as well.

According to the financial sector on the 2nd, the consolidated net profits of eight listed bank holding companies?KB, Shinhan, Hana, Woori, Industrial Bank of Korea (IBK), DGB, BNK, and JB?are expected to decrease by 23% year-on-year to 10.6 trillion KRW this year. This figure is 21% lower than the previous market estimates.

Researcher Kyunghoe Koo of SK Securities stated, "The reasons for the decline in bank sector profits include a sharp drop in non-interest income due to financial market instability, deterioration in asset quality and increased loan loss provisions, contraction of net interest margin (NIM), and a slowdown in loan growth," adding, "Although the consensus on this year's earnings has only been slightly adjusted so far, it is expected to decline soon."

The loan loss provisions of the eight bank holding companies are expected to increase by 1.9 trillion KRW from the previous year to 6.7 trillion KRW this year. Accordingly, the loan loss provision ratio is projected to rise by 0.1 percentage points year-on-year to 0.40%. Additionally, the forecasted NIM for this year is 1.77%, down 0.13 percentage points from the previous year.

Within the financial sector, unstable macroeconomic indicators such as the sharp drop in oil prices and the weakening of the Korean won due to the spread of COVID-19, as well as the rapid fluctuations in bond yields caused by turmoil in the money markets, have raised concerns about a financial system crisis. As a result, the profitability deterioration of the banking sector has already begun since the first quarter. In fact, foreign investors, who hold a pessimistic outlook on the domestic banking sector, have net sold approximately 706 billion KRW worth of banking sector stocks in the first quarter, marking the third consecutive quarter of net selling since the third quarter of last year.

Hana Financial Investment forecasted the estimated net profit of the eight bank holding companies for the first quarter of this year to be about 3.5 trillion KRW, which is approximately 9.0% lower than the same period last year. However, since the downward revision of profit estimates in the financial market has not yet fully begun, including factors such as interest rate cuts and rising loan loss provisions, there is a high possibility that market estimates will further and rapidly decline in the future.

Researcher Jungwook Choi of Hana Financial Investment observed, "The first quarter earnings of 3.5 trillion KRW fall below the market estimates made earlier this year, but the full-scale earnings downgrade phase has not yet arrived," adding, "In some banks, the earnings shortfall may be larger than expected due to poor performance of non-bank affiliates and weak non-interest income in banks."

Due to two interest rate cuts in the second half of last year and the sale of refinancing loans by commercial banks, the decline in NIM was already a foregone conclusion in the first quarter. Furthermore, domestic market interest rates sharply fell again from February, and the Bank of Korea held an emergency meeting last month and unexpectedly cut the base rate by 0.5 percentage points. Researcher Choi predicted that the banks' first-quarter NIM would decline by an average of 0.04 percentage points and that the downward trend in margins would continue going forward.

Moody's warned yesterday that the asset risk of domestic commercial banks in Korea is expected to increase due to the impact of COVID-19. This came just a week after releasing a report considering downgrading the credit ratings of some regional banks. Moody's is also reviewing whether to downgrade the credit rating of the Industrial Bank of Korea, a government-backed bank specializing in small and medium-sized enterprises. Additionally, Moody's has downgraded the outlook for Korea's life insurance industry from 'stable' to 'negative.'

According to Hana Financial Investment's estimates, the first-quarter net profits of IBK (-20.2%), DGB Financial (-22.4%), and BNK Financial (-17.2%) recorded double-digit decreases compared to the same period last year. Also, Woori Financial, which suffered from the overseas interest rate-linked derivative-linked fund (DLF) scandal, is expected to see its net profit shrink by more than 19.5%.

Researcher Choi said, "Due to uncertainties such as the scale of potential future non-performing loans, the visibility of profits in the banking sector is very low," adding, "In the worst-case scenario, the banks' return on equity (ROE) could fall to around 3-4%, but this would be a temporary phenomenon rather than a structural one."

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