[The Crisis of Korean Finance] Limits of Traditional Revenue Structures... 'Strengthening Digital Banking' Is the Only Way to Survive

Corona Trigger in the Ultra-Low Interest Rate Era
Q1 NIM Hits Record Low at 1.46%
Additional Regulations on Collateral and Jeonse Loans Also Impact Mortgage Interest Income

The financial industry in 2020 stands at a crossroads of significant change. After several years of unprecedented prosperity, it now faces a critical test directly linked to survival. The spread of the novel coronavirus infection (COVID-19) has brought a crisis not only to the domestic market but also to global finance. It is predicted that the survival of domestic financial companies will be determined by how they overcome this challenge. Additionally, with big tech companies like Naver and Kakao entering the financial industry backed by advanced technology, existing financial firms are expected to face unprecedented crises and moments of challenge. Asia Economy diagnoses the problems of the Korean financial industry as perceived by domestic financial company CEOs and explores solutions to overcome sector-specific crises in a five-part series.

The aftermath of COVID-19, the entrenchment of ultra-low interest rates, the onslaught of big tech (large information technology companies), and intensified competition due to the expansion of the fintech (financial technology) market have placed banks at a crossroads. Plummeting interest rates, deteriorating profitability, and the ticking time bomb of COVID-19 financial support defaults indicate that banks can no longer maintain their current status through traditional deposit and loan operations and fee-based business alone.

◆ No business in worsening profitability = The net interest margin (NIM), a representative profitability indicator for banks, is on a downward trajectory. According to financial authorities on the 18th, KB Kookmin Bank's NIM for the first quarter of this year was 1.71%, down 0.15 percentage points from the same period last year, while Shinhan Bank's was 1.61%, a decline of 0.20 percentage points. Hana Bank's NIM fell by 0.16 percentage points to 1.55%, and Woori Bank's dropped by 0.13 percentage points to 1.52%.

The overall NIM for domestic banks in the first quarter was 1.46%, the lowest ever recorded. The delinquency rate for small and medium-sized enterprise loans, which are particularly vulnerable to COVID-19 impacts, stood at 0.57% at the end of April, up 0.04 percentage points from the end of the previous month. There are growing concerns that defaults could rapidly escalate once the financial authorities' loan maturity extensions and interest payment deferral measures end.

The non-interest income of the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?was 745.1 billion KRW in the first quarter, a 17.8% decrease compared to 906.3 billion KRW in the first quarter of last year. This decline is largely attributed to reduced fee income, which constitutes a significant portion of non-interest income.

Fee income mainly arises from the wealth management (WM) sector, including funds, bancassurance, and trusts. However, the private fund market has been severely contracted due to last year's losses from overseas interest rate-linked derivative-linked funds (DLF), the large-scale suspension of redemptions by Lime Asset Management, and subsequent sanctions by financial authorities. The balance of private fund sales at the four banks stood at 17.4639 trillion KRW at the end of April, down 16.5% from 20.906 trillion KRW at the end of April last year.

Due to the base interest rate dropping to 0.5%, the minimum interest rate on mortgage loans at commercial banks is expected to enter the 1% range. This means it is becoming difficult to offset losses in other sectors with interest income. Meanwhile, the government announced additional real estate market regulations the day before, including a complete ban on mortgage loans for housing sales and rental businesses.

The measures also include restrictions on guarantees for jeonse (key money deposit) loans when purchasing apartments priced over 300 million KRW in speculative or overheated speculation zones, and immediate recall of loans if an apartment priced over 300 million KRW is purchased after receiving a jeonse loan. Choi Jung-wook, a researcher at Hana Financial Investment, analyzed, "Since 2016, the growth rate of jeonse loans at the four major commercial banks has explosively increased by 30-40% annually, and currently, jeonse loans account for nearly 20% of housing-related loans, including mortgage loans and group loans. The impact of regulations related to jeonse loans could be somewhat significant."

◆ Ongoing restructuring and intensifying digital innovation competition = Restructuring of the traditional business environment is also accelerating. KB Kookmin Bank plans to close 15 branches next month. Shinhan Bank also plans to consolidate four branches within the next month. The total number of branches nationwide for the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?decreased by 84 from 3,525 at the end of last year to 3,441 by the end of May.

The trend of companies armed with advanced IT technology and agility entering finance in earnest is also tightening the noose around banks. Naver Financial recently partnered with Mirae Asset Daewoo to deepen its financial footprint with the 'Naver Account,' which offers benefits such as point accumulation and deposit income. Kakao Pay also launched a mobile account in collaboration with Hana Bank.

These companies are supporting the expansion of financial territory initiated by internet-only banks like KakaoBank and K Bank. Recently, fintech companies have also been encroaching on the market share of existing banks in the overseas remittance sector. Financial industry insiders unanimously stated, "The entire financial industry, centered on banking, has entered an era of infinite competition."

Banks are struggling for survival through various forms of restructuring and digital innovation. They are strengthening digital banking by promoting digital transformation across all operations or introducing systems that enable revolutionary improvements in work processes.

An official from a commercial bank said, "To respond to the aggressive moves of fintech companies, banks are focusing on advancing work processes through digital transformation," adding, "If new revenue sources are not continuously discovered through open innovation, survival itself may become difficult."

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