Post-COVID Era, Challenges for the Banking Industry? "Risk Management is the Top Priority"

[Image source=Yonhap News]

[Asia Economy Reporter Kangwook Cho] It is argued that the behavior of economic agents will structurally change due to the novel coronavirus infection (COVID-19) pandemic phenomenon, and especially the banking industry, which is highly sensitive to economic cycles, is facing new challenges. Accordingly, it is pointed out that the domestic banking industry must actively respond to the changes in the business environment caused by the spread of COVID-19 while making efforts in risk management.

According to the financial sector on the 9th, the International Financial Center stated in its report "Challenges for the Banking Industry in the Post-COVID Era" that the banking industry is facing issues such as ▲ accelerated digitalization, ▲ prolonged ultra-low interest rates, ▲ contraction of overseas operations, and ▲ concerns over an increase in non-performing loans due to COVID-19.

First, in a situation where demand for face-to-face transactions had been structurally decreasing, this incident is expected to serve as a catalyst for banks to transform into digital banks through policy measures.

It is expected that pressure to lower policy interest rates will increase for the time being, maintaining a low interest rate environment for a considerable period. Accordingly, there is a need for strategies to respond to the contraction of deposit and loan businesses.

Kim Widae, a senior researcher at the International Financial Center, advised, "In a low-interest-rate environment, a simultaneous reduction in deposit and loan interest rates is inevitable. However, when deposit rates approach the zero lower bound, methods such as lowering loan interest rates more than deposit rates to internalize costs (reducing NIM) and raising interest rates on marginal companies and long-term loans should be considered."

The contraction of overseas operations is also expected to be inevitable. This is because foreign direct investment (FDI) by companies, which was the background for banks' overseas expansion, is shrinking due to partial reshoring (return of manufacturing companies to their home countries) after COVID-19, and local retail sales may also shrink due to interest rate declines and an increase in non-performing loans.

In particular, the relative strength of the dollar, recognized as cash in the international financial market (weakness of the yen and euro), is pointed out to potentially induce depreciation of Southeast Asian currencies where Korean banks mainly operate, raising concerns about foreign exchange losses.

There are also concerns about an increase in non-performing loans. As policy authorities temporarily ease bank soundness regulations and encourage credit expansion to low-credit-rating companies due to the spread of COVID-19, an increase in non-performing loans is inevitable. Accordingly, there is also a persistent concern that bank restructuring may be necessary if soundness regulations are strengthened again after the crisis ends.

This could lead to a deterioration in bank profitability. Due to the recognition of the need for risk management and decreased demand, the growth of loans is slowing, and net interest margins are shrinking due to low interest rates, raising the possibility of an increase in non-performing loans and operational losses.

In light of these challenges, it is pointed out that the banking sector must make efforts to manage accumulating risks such as deteriorating soundness. This is because concerns about profit slowdown have increased since the second quarter of this year due to the impact of COVID-19.

Senior researcher Kim emphasized, "Due to the characteristics of the banking industry, which is highly sensitive to economic cycles, a profit slowdown is expected after the second quarter of this year, so proactive management for cost reduction is necessary," adding, "It is also important to be cautious about the possibility of asset price overheating as bank deposits inevitably move to stock and real estate markets due to the low-interest-rate situation."

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