Q1 Financial Holding Company Results... Shinhan and Hana Smile, KB and Woori Frown (Comprehensive)

Net Interest Margin Continues to Decline for All Four Holding Companies
The Real Issue Lies in Q2 Reflecting COVID-19 Impact

[Asia Economy Reporter Kim Min-young] The four major financial groups all sounded a "warning" in the first quarter of this year. Due to the cooling of the financial market caused by the COVID-19 pandemic and the base interest rate cuts, some even recorded negative earnings. Given the nature of the financial market, where the real economy's sluggishness is reflected with a time lag, concerns are rising that from the second quarter, when the impact of COVID-19 is fully reflected, these groups may 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 a decrease of 8.9% compared to the same period last year. A Woori Financial official explained, "Fortunately, net operating income showed favorable improvement through revenue structure enhancement, 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 about 1.5% (14 billion won) compared to 918.4 billion won in the same period last year. Although it maintained its position as a 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 is 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 increased by 10.8% (51 billion won) to 531 billion won from 480 billion won last year. Non-interest income fell by 10.6% (88 billion won) to 734 billion won from 822 billion won last year due to a significant decrease in securities and foreign exchange derivatives income caused by stock price declines.

On the same day, Hana Financial Group posted a first-quarter net profit of 657 billion won, 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 sluggishness 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 highly dependent on interest rate margins between loans and deposits, the lower this figure falls, the more profitability inevitably deteriorates." 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 NIM of core affiliates, the banks, was 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 by significantly increasing low-cost (low-interest) deposits, which are core deposits. These deposits refer to demand deposits with an interest rate of about 0.1% per annum, and market interest rate-based money market deposit accounts (MMDA). Checking accounts or payroll accounts fall under this category.

The future is more problematic. Experts predict that from the second quarter, when the adverse effects of the COVID-19 pandemic are reflected, the performance deterioration of holding companies will intensify. They agree that this is just the beginning. Lee Dae-gi, head of the Bank 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," adding, "Banks will have to build up loan loss provisions from the second quarter or later in preparation for losses, so soundness and profitability will inevitably worsen."

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