Financial Holding Companies' Q1 Net Profit Declines... 'Corona Shock' Starts from Q2 (Comprehensive)

Average Net Income Expected to Decrease by 6%... Shock Likely if Zero Interest Rate Impact Intensifies in Q2

[Asia Economy Reporter Haeyoung Kwon] 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 decline by an average of about 6%, performing better than initially feared, the impact of zero interest rates caused by the spread of the novel coronavirus infection (COVID-19) is expected to be fully reflected from the second quarter, with the shock becoming a reality.

According to the financial sector on the 22nd, KB Financial will announce its first-quarter 2020 management performance on the 23rd. On the 24th, Shinhan Financial and Hana Financial, and on the 27th, Woori Financial and IBK Industrial Bank of Korea are scheduled to announce their results. On the 28th, BNK Financial and JB Financial will announce their results, followed by DGB Financial on the 7th of next month.

The first-quarter earnings of financial holding companies are expected to decline across the board. According to financial information provider FnGuide, Shinhan Financial Group is estimated to record a net income of 864.1 billion KRW in the first quarter, down 10.5% from 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 have 537.3 billion KRW, and Woori Financial Group 485 billion KRW, down 3% and 21.1%, respectively.

This decline in earnings was already anticipated. The net interest margin (NIM) decline is gradually reducing banks' profit-generating capacity. However, except for Woori Financial, the decrease in net income compared to the previous year is estimated to be around 6% on average, which is considered better than expected. Securities firms estimate 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" (significant 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 corporate bond market tightening 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, Korean banks performed relatively well. JPMorgan Chase, the largest U.S. bank, reported a 69% drop in net income in the first quarter compared to the previous quarter, down to 2.9 billion USD, while Wells Fargo's net income plunged 89% to 653 million USD during the same period. Both banks sharply increased their loan loss provisions in anticipation that borrowers would fail to repay principal and interest on time, causing their net income to shrink drastically.

The problem starts from the second quarter. As the Bank of Korea's big cut shock 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.

Jaewoo Kim, 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 soundness. From the second quarter, whether banks can minimize the decline in earnings compared to the previous year and defend their performance will be the key issue."

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