Four Major Financial Holding Companies Set Aside Provisions... "Preparing for Default Risks Even if Profits Decline" (Comprehensive)

Chairman Kim Jeong-tae Takes Direct Action to Strengthen Soundness
4 Major Financial Groups Accumulated 670 Billion Won in Q1
Experts Say "Far from Enough, Trillions More Needed"

[Asia Economy reporters Kim Hyo-jin and Kim Min-young] Kim Jung-tae, chairman of Hana Financial Group, has personally taken charge of managing loan loss provisions to strengthen soundness. This is interpreted as a determination to prepare in advance for the risk of insolvency caused by the impact of the novel coronavirus infection (COVID-19), with even the head of the financial group stepping in. As gloomy forecasts suggest that the loan loss costs of domestic banks could increase by 1.5 trillion won compared to last year, financial groups are putting all their efforts into managing soundness.

According to the financial sector on the 12th, Hana Financial is reportedly planning to re-examine existing loan assets and credit portfolios and accumulate more loan loss provisions to prepare for insolvency risks.

Loan loss provisions are accounting accounts that financial companies treat as expenses in anticipation that some of the money lent, such as loans, will not be recovered. The more provisions accumulated, the lower the profits and the higher the expenses, which is unfavorable for profitability but improves soundness. Chairman Kim's order to accumulate sufficient provisions means preparing for future insolvency accordingly.

Hana Financial accumulated 92.9 billion won in provisions in the first quarter of this year. This is a 43.6% (71.8 billion won) decrease compared to the same period last year. The industry pointed out that this might be an underestimation of future risks amid the ongoing COVID-19 situation. In this regard, a senior Hana Financial official dismissed the concerns, saying, "We followed the thorough supervision of financial authorities and the proper handling by accounting firms," and "The collateral ratio of loan receivables held by Hana Financial is relatively higher than that of other financial companies." Since these are secured loans, losses would incur less cost even if they occur.

Kim Jung-tae, Chairman of Hana Financial Group

Unlike Hana Financial, other financial groups have accumulated large amounts of provisions. Shinhan Financial accumulated 258.6 billion won in loan loss provisions in the first quarter of this year, an 11.0% increase compared to the same period last year. During the same period, KB Financial increased provisions by 55.6% to 243.5 billion won. Woori Financial also significantly increased to 75 billion won from 54 billion won in the same period last year.

The four major financial groups accumulated a total of 670 billion won in provisions in the first quarter alone. However, experts in the financial sector expect this amount to be far from sufficient, and trillions of won need to be accumulated by the end of the year.

In particular, major banks, which are key affiliates, constantly bear the insolvency risks that could materialize at any time. Banks are concerned that the surge in loans due to the COVID-19 impact may lead to a wave of insolvencies in the second half of the year. According to the Bank of Korea, corporate loan balances in the banking sector increased by 16 trillion won from the previous month to 945.1 trillion won last month. This is the third-largest increase since statistics began in June 2009, following April (27.9 trillion won) and March (18.7 trillion won) of this year. As of May, this is the largest increase since statistics were compiled. Household loan balances also rose by 5 trillion won to 920.7 trillion won.

There is also an emergency in managing delinquency rates. The loan delinquency rates of the four major banks?Shinhan, KB Kookmin, Hana, and Woori?rose by 0.02 percentage points each compared to the previous month at the end of last month. The delinquency rates, which were between 0.21% and 0.33% at the end of April, were recorded between 0.23% and 0.35% a month later. By sector, household loan delinquency rates rose from 0.16%?0.32% to 0.17%?0.33%, and corporate loan delinquency rates increased from 0.22%?0.38% to 0.24%?0.41%.

The problem is that the aftereffects of the loan surge may appear from the second half of the year when the impact of COVID-19 is fully reflected in the indicators. Lim Hyung-jun, head of the Capital Market Research Division at the Korea Institute of Finance, said, "Under the ultra-low interest rate regime, banks' net interest margins (NIM) will record an all-time low," and "Under a pessimistic scenario, loan loss costs of domestic general banks could increase by up to 1.5 trillion won compared to last year."

Accumulating provisions has become a global 'trend.' Bank of America (BoA), the No. 1 bank in the U.S., set aside 4.76 billion dollars in provisions in the first quarter of this year, five times more than the same period last year, cutting its net profit in half. Citigroup also accumulated 7.03 billion dollars in provisions, more than three times last year's amount.

According to a report by the UK Financial Times, U.S. banks' provisions in the first quarter increased by 350% compared to the same period last year, and European banks also increased by 269%. This is the highest level since the 2008 global financial crisis.

Financial authorities are closely monitoring the situation. While maintaining the stance of COVID-related financial support, they are also keenly attentive to soundness trends. A financial authority official said, "Loan loss provision accumulation is ultimately a bank's autonomous management area, but the authorities are also checking it closely." Yoon Seok-heon, governor of the Financial Supervisory Service, recently mentioned, "From now on, it is necessary to secure maximum loss absorption capacity by increasing provisions and internal reserves to prepare for the prolonged COVID-19 situation."

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