Conflicting Views on Q1 Financial Holding Companies' Results: 'Strong Performance' vs 'Start of Shock'

[Asia Economy Reporter Kangwook Cho] There are mixed interpretations regarding the first-quarter performance of domestic financial holding companies this year. While some view it as a solid performance despite the COVID-19 pandemic, others believe that the shock originating from the real economy will soon intensify within the financial sector.

According to the financial sector on the 2nd, the total net profit of the four major financial holding companies?Shinhan, KB, Hana, and Woori Financial?reached 2.8371 trillion KRW in the first quarter, approaching 3 trillion KRW. This represents a 1.4% decrease compared to the same period last year (2.8788 trillion KRW).

Shinhan Financial Group ranked first with 932.4 billion KRW, followed by KB Financial Group (729.5 billion KRW), Hana Financial Group (657 billion KRW), and Woori Financial Group (518.2 billion KRW).

Among experts, the prevailing view is that the performance of the four major financial holding companies was "relatively solid." In fact, Woori Financial’s first-quarter net profit decline was limited to 8.9%, despite expectations of a double-digit drop this quarter. Following the better-than-expected results, financial stocks surged, and foreign investors engaged in net buying of major financial stocks.

Jae-woo Kim, a researcher at Samsung Securities, said, "Last week, following the earnings announcements of financial holding companies including KB Financial, bank stocks rose sharply," adding, "This is due to eased concerns about second-quarter earnings after the banks’ earnings announcements, as well as the relative attractiveness of bank stocks increasing amid the recent sharp recovery in stock prices of other sectors."

On the other hand, concerns have been raised that the full impact of COVID-19 will begin in the second quarter. This is because the government’s COVID-19 support measures have increased worries about the deterioration of profitability and soundness of banks that are backing financial support.

International credit rating agency Fitch recently downgraded the long-term issuer default rating (IDR) outlooks of Kookmin Bank and Shinhan Bank from "stable" to "negative," considering the adverse effects of the COVID-19 outbreak.

Fitch analyzed, "The economic impact of the COVID-19 outbreak will exert significant pressure on banks’ creditworthiness over the next two years," and noted that "the risk level of the domestic banking industry has increased."

Although banks posted better-than-expected first-quarter results, there is an interpretation that this was not factored into their credit ratings. The impact of the COVID-19 crisis was not reflected in the first-quarter results, and crisis recovery measures led by policy and private banks are seen as having a negative effect on bank credit.

Young-soo Seo, an analyst at Kiwoom Securities, stated, "Following the COVID-19 crisis, the real estate market downturn has brought to the surface the deterioration of real estate financing such as real estate project financing (PF) and loans to rental business operators. Additionally, concerns about insolvency due to a sharp drop in exports are spreading from aviation and transportation to major conglomerates including automobile and steel industries. This suggests signs of fundamental damage to banks in various forms following overseas fund losses," adding, "If the fundamental deterioration of banks accelerates after the COVID-19 crisis and bank ratings are downgraded, it will have a considerable impact on foreign investors."

Daegi Lee, head of the Banking and Insurance Research Division at the Korea Institute of Finance, pointed out, "Due to export declines and internal sluggishness caused by COVID-19, the possibility of insolvency among mid-sized and large companies is increasing amid the economic downturn," and added, "Since banks will need to build up loan loss provisions from the second quarter or later in preparation for losses, their soundness and profitability are bound to deteriorate."

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