No Reflection of Corona Shock Yet... Four Major Financial Holding Companies Show Red Flags in Earnings

Q1 Performance of 4 Major Banks: Shinhan and Hana Up, Kookmin and Woori Down
NIM Continues to Decline Across All Four

[Asia Economy Reporter Kim Min-young] The four major financial groups, which celebrated record-breaking performances last year, all sounded “warning signals” in the first quarter of this year. Some even recorded negative earnings due to the cooling of the financial market caused by the COVID-19 pandemic and the base interest rate cuts. Given the nature of the financial market, where the real economy’s sluggishness is reflected with a time lag, concerns are emerging that from the second quarter?when the impact of COVID-19 is expected to be fully reflected?these groups could face a double whammy of declining “soundness” and “profitability.”

According to the financial sector on the 27th, Woori Financial Group announced that it recorded a net profit of 518.2 billion won in the first quarter. This is an 8.9% decrease compared to the same period last year. A Woori Financial official explained, “Fortunately, net operating income showed favorable improvement through the enhancement of the revenue structure, exceeding initial market expectations.”

The performance of Shinhan Financial Group, announced on the 24th, also fell short of expectations. Shinhan Financial Group’s consolidated net profit for the first quarter was 932.4 billion won, an increase of only about 1.5% (14 billion won) compared to 918.4 billion won in the same period last year. Although it maintained its position as the leading bank, the net profit essentially decreased. Shinhan Financial explained that considering one-off factors and the effect of acquiring shares in Orange Life, an insurance company incorporated as a subsidiary last year, the recurring net profit was in the mid-800 billion won range.

Interest income increased, while non-interest income slightly decreased. Shinhan Financial recorded interest income of 2.0039 trillion won, up 5% (96 billion won) from 1.908 trillion won in the same period last year. Fee income also rose by 10.8% (51 billion won) to 531 billion won from 480 billion won in the previous year. Non-interest income fell by 10.6% (88 billion won) to 734 billion won from 822 billion won in the same period last year, due to a significant decrease in securities and foreign exchange derivative gains caused by stock price declines.

Hana Financial Group, which also released its results on the same day, posted a net profit of 657 billion won in the first quarter, a 20.3% (111 billion won) increase compared to the same period last year. However, this was influenced by the cost of voluntary retirement (126 billion won) incurred due to the introduction of a wage peak system, which was reflected in last year’s first-quarter net profit. Excluding this cost, last year’s first-quarter recurring net profit was about 672 billion won. This means that this year’s first-quarter profit shrank by about 15 billion won compared to the same period last year.

KB Financial Group suffered the biggest hit. KB Financial earned 729.5 billion won, down 13.7% (116.2 billion won) from the first quarter of last year. The capital market sector’s poor performance was painful. Foreign currency bond valuation losses occurred, and there was about 34 billion won in credit valuation adjustment (CVA) losses related to over-the-counter derivatives. In particular, KB Securities posted a loss of 21.4 billion won, turning to a deficit.

Especially concerning is the continuous decline in net interest margin (NIM), a key indicator of profitability. A financial sector official expressed concern, saying, “In domestic financial companies that heavily rely on interest rate margins between loans and deposits, a decline in this figure inevitably worsens profitability.” In fact, Shinhan Financial’s NIM in the first quarter of this year was 1.86%, down 0.19 percentage points from 2.07% in the first quarter of last year. KB (1.84%) and Hana (1.62%) also fell by 0.14 and 0.18 percentage points, respectively. Accordingly, the NIMs of core affiliates, the banks, were also directly affected. Shinhan Bank’s NIM dropped 0.20 percentage points from 1.61% to 1.41% in one year. KB Kookmin, Hana, and Woori Bank NIMs also declined.

At least in the first quarter, it is analyzed that they managed to hold up by significantly increasing low-cost (low-interest) core deposits. These deposits refer to demand deposits and market interest rate-based money market deposit accounts (MMDA) with interest rates around 0.1% per annum. Examples include checking accounts and payroll accounts.

The problem lies ahead. Most experts predict that the deterioration of holding companies’ performance will intensify from the second quarter, when the negative effects of the COVID-19 pandemic are reflected. They agree that this is just the beginning. Lee Dae-gi, head of the Banking and Insurance Research Office at the Korea Institute of Finance, pointed out, “Due to the COVID-19-induced decline in exports and internal sluggishness, the possibility of insolvency in medium and large enterprises is increasing amid the economic downturn. Banks will have to build up loan loss provisions from the second quarter or later to prepare for losses, so soundness and profitability will inevitably worsen.”

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