Financial Holding Companies Hold Firm Amid Q1 Earnings Concerns... COVID Shock Expected from Q2 Onwards

Average Net Income Expected to Decrease by 6%... Impact of Zero Interest Rate in Q2 Likely to Cause Significant Shock

[Asia Economy Reporter Kwon Haeyoung] Starting with KB Financial Group on the 23rd of this month, the earnings season for the first quarter of this year for major financial holding companies will open this week. Although the net income of major financial holding companies is expected to slow down by about 6% on average and perform better than initially feared, the dominant view is that the shock will materialize from the second quarter, when the impact of zero interest rates caused by the spread of the novel coronavirus infection (COVID-19) is fully reflected.

According to financial information firm FnGuide on the 22nd, Shinhan Financial Group is estimated to record a net income of 864.1 billion KRW in the first quarter, a decrease of 10.5% compared to the same period last year. During the same period, KB Financial is estimated to decrease by 4.2% to 810.3 billion KRW. Hana Financial Group is predicted to record 537.3 billion KRW, and Woori Financial Group 485 billion KRW, decreasing by 3% and 21.1%, respectively.

The slowdown in the first-quarter earnings of financial holding companies was anticipated. The banks’ ability to generate profits is gradually declining due to the narrowing of net interest margin (NIM). However, except for Woori Financial, the decrease in net income compared to the previous year is limited to an average of about 6%, which is considered better than expected. The securities industry estimates that Woori Financial has set aside more loan loss provisions than other financial holding companies in preparation for economic uncertainty.

The impact of the Bank of Korea’s benchmark interest rate “big cut” (a large-scale rate reduction) began to take effect in mid-March, so it was largely not reflected in the first-quarter results. The banks’ NIM is estimated to have fallen by about 3 basis points in the first quarter. The sharp increase in real estate transactions in the first quarter and the record-high corporate loans in March also led to solid growth in bank lending. According to the Bank of Korea, household loans increased by 9.6 trillion KRW and corporate loans by 18.7 trillion KRW in March alone. Due to the tightening of the corporate bond market in March, even large corporations that had not previously sought bank loans turned to banks, making the loan growth rate stand out to the extent that the term “seasonal off-season” seemed inappropriate.

Compared to U.S. banks hit hard by COVID-19, the performance is relatively strong. JPMorgan Chase, the largest U.S. bank, recorded a net income of 2.9 billion USD in the first quarter, down 69% from the previous quarter, while Wells Fargo’s net income plunged 89% to 653 million USD during the same period. Both banks sharply increased loan loss provisions in anticipation that borrowers might not repay principal and interest on time, causing net income to shrink drastically.

The problem starts from the second quarter. As the shock from the Bank of Korea’s big cut in the benchmark interest rate is fully reflected, downward pressure on NIM is increasing, and the domestic economy is expected to contract, rapidly worsening the environment surrounding the banking industry. International credit rating agency Standard & Poor’s forecasted that South Korea’s economic growth rate will be -1.5% this year. There is a high possibility that loan loss costs will gradually rise in the second half of the year. Additionally, to respond to COVID-19, commercial banks are facing increased burdens by extending principal maturities and deferring interest payments for at least six months on loans to small and medium-sized enterprises and small business owners, supplying low-interest loans, and investing in bond market stabilization funds and securities market stabilization funds.

Kim Jaewoo, a researcher at Samsung Securities, analyzed, “The decline in market interest rates increases pressure to reduce NIM, and the impact of COVID-19 on domestic demand and the global economy will exacerbate concerns about asset quality. From the second quarter, whether banks can minimize the year-on-year decline in earnings and defend their performance will be the key issue.”

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