Hana Financial Research Institute Warns of Profitability Decline Due to Increased Credit Loss Costs in Financial Sector Next Year... Spread of Deferred Risks Alert

[Asia Economy Reporter Kim Min-young] There is a forecast that the profitability of South Korea's financial sector will weaken next year.

Hana Financial Management Research Institute, affiliated with Hana Bank, stated in its "2021 Financial Industry Outlook" report that "next year, the financial sector's profitability will decline due to an increase in loan loss provisions amid the normalization of asset growth."

Additionally, the institute emphasized the need to prepare for the spread of deferred risks caused by the impact of the novel coronavirus disease (COVID-19). It also predicted that the entry of non-financial companies such as big tech (large information and communication companies) into the financial industry will become more active, leading to fiercer new competition than ever before.

Financial Sector, Growing Concerns over Profitability Deterioration Due to Deferred Risks

The institute expects that, considering this year's exceptional asset growth in loans due to policy support, overall asset growth will return to pre-COVID-19 levels next year.

With economic uncertainty remaining and continued demand for funds from economic agents, the increase in household loans is expected to slow due to strengthened regulations, while corporate loans centered on small and medium-sized enterprises are expected to continue growing across all sectors.

In banking, the decline in net interest margin (NIM) is expected to stabilize, but profitability is projected to decrease due to sluggish recovery in non-interest income and increased loan loss provisions. Across the financial industry, soundness indicators reflect some optical illusions, and despite proactive provisioning, concerns about potential non-performing loans remain significant.

In the non-banking sector, delinquency rates are expected to rise, especially among vulnerable groups, and the financial soundness of individual business owners in economically sensitive industries is anticipated to be very weak. Researcher Baek Jong-ho emphasized, "Risk management is necessary in preparation for after June next year, when maturity extensions, interest payment deferrals, and various regulatory ratio flexibilizations come to an end." He added, "While the increase in loan loss provisions in banks is a problem, the possibility of insolvency in the secondary financial sector is even greater."

Improvement in Some Financial Sectors' Performance Expected Due to Abundant Liquidity, Institutional/Policy, and New Business Effects

Among non-banking sectors, securities, insurance, and asset management are expected to see slight improvements in profitability. In securities, performance is expected to improve due to growth in brokerage services driven by a preference for direct investment based on abundant liquidity and increased investments related to the New Deal policy. Asset management is also expected to improve due to growth centered on alternative investments, despite weakening preference for traditional investment products such as equity funds.

In insurance, although the secondary spread loss is deepening due to the ultra-low interest rate environment, profitability is expected to improve due to eased reserve burdens related to variable insurance, and stabilization of loss ratios in automobile and indemnity insurance. In particular, the gradual expansion of new business sectors such as digital healthcare and micro-short-term insurance is expected to have a positive impact on performance improvement.

A Year Marking the Completion of Financial Innovation Including Big Tech Growth, Licensing Unit Reorganization, and Deregulation

With the COVID-19 impact making non-face-to-face (untact) culture widespread and increasing the importance of mobile platforms, it is expected to be a year of rapid financial innovation.

The entry of big tech companies with platforms into the financial industry is expected to accelerate further, and with the introduction of small licenses and segmentation of licensing units, not only fintech (finance + technology) but also small-scale specialized financial companies will newly emerge, forming various competitive structures.

Jung Hee-soo, head of the Financial Industry Team 1, emphasized, "Next year, with the revision of the Electronic Financial Transactions Act, including the introduction of payment instruction transmission and comprehensive payment settlement businesses, the open banking initiative that has been promoted so far will be completed, posing a significant threat to existing financial companies. Existing financial companies also need thorough preparation through the development of innovative services."

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