4 Major Financial Holding Companies Project 16% YoY Decline in Q2 Net Profit: "The Party Is Over"

Kookmin, Shinhan, Hana, and Woori Financials Achieved Record-Breaking Results Until Last Year
Q2 Net Profit Estimated at 2.8426 Trillion Won... Expected to Decrease by Over 16% Compared to Previous Year
Setbacks Include Lime Fund Compensation Payments, COVID-19 Loan Maturity Extensions, and Declining Net Interest Margin

[Asia Economy Reporter Jo Gang-wook] The second-quarter earnings of domestic financial groups, which had posted 'record-breaking' performances until last year, are expected to drop by double digits this year. Unlike the relatively favorable results recorded until the first quarter despite the financial market contraction caused by the COVID-19 pandemic and the low-interest-rate environment, profitability is rapidly deteriorating. Concerns have been raised that the downward trend will deepen in the second half of the year, signaling the onset of a full-scale 'financial cold wave.'

According to an analysis of earnings forecasts by financial information firm FnGuide on the 10th, the combined net profit of the four major financial holding companies?KB Kookmin, Shinhan, Hana, and Woori Financial?was estimated at 2.8426 trillion won for the second quarter of this year. This represents a decrease of more than 16% (542.7 billion won) compared to the same period last year (3.3853 trillion won). Unlike the first quarter, which was considered a 'solid performance' with a 1.4% decline, the second quarter appears to have been unable to avoid the impact of COVID-19.

By group, Woori Financial showed the largest decline. The second-quarter net profit forecast for Woori Financial was 478.8 billion won, expected to decrease by a staggering 27.2% compared to the same period last year. Shinhan Financial is also projected to drop by 17.7% to 881.3 billion won during the same period. KB Financial and Hana Financial are estimated at 876.7 billion won and 613.7 billion won, respectively, down 11.6% and 7.8% from the same period last year.

Compensation payments related to various financial products such as the Lime Trade Finance Fund, Italy Healthcare Fund, and Germany Heritage Derivative-Linked Securities (DLS), along with proactive provisioning due to the COVID-19 crisis, are cited as the main factors behind the profit decline. First, the Financial Supervisory Service's Dispute Mediation Committee (Dispute Committee) decided to provide 100% compensation for sales of the Lime Trade Finance Fund since November 2018, which is expected to affect net profit reductions with compensation payments of 83 billion won for Shinhan Financial, 36 billion won for Hana Financial, and 69 billion won for Woori Financial. If 100% compensation is accepted, financial groups will have to pay and reserve compensation and provisions ranging from 36 billion won to 160 billion won.

Loan loss expenses are also expected to be conservatively provisioned in preparation for next year. Contrary to initial expectations, the global number of COVID-19 cases continues to reach record highs with no signs of easing, prompting the government to consider temporary loan maturity extensions. Consequently, the burden of provisions is likely to increase significantly after next year. The market expects each bank to set aside around 100 billion won in provisions this year. The Bank of Korea's base rate cuts also make a decline in net interest margin (NIM) inevitable. The NIM in the first quarter of this year was already about 11 to 14 basis points lower than in the second quarter of last year. The market estimates that the overall banking sector's NIM fell by about 4 to 5 basis points in the second quarter compared to the previous quarter. Based on last year's data, the sensitivity of net interest income per 1 basis point change in NIM for large banks is estimated at approximately 37 billion won. DB Financial Investment analyzed that the NIM decline compared to the same period last year is equivalent to a 9% change in average assets. Although loan growth was high this year, the average balance growth rate compared to the same period last year is unlikely to exceed 6%, failing to offset the NIM decline.

Within the financial sector, concerns are growing that the crisis is ongoing, with worries about worsening earnings extending beyond the second half of this year into next year. There are fears that a tsunami of non-performing loans next year could escalate into broader financial instability. As a result, all financial groups have designated risk management as a key priority.

Jo Boram, a researcher at NH Investment & Securities, diagnosed, "Currently, policy measures such as loan maturity extensions and interest payment deferrals are securing some lending capacity and asset soundness for banks, but potential default risks still exist."

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