Banking Sector Q3 Performance Expected to 'Hold Up'... "Minimal Impact from Loan Pace Adjustment"

Combined Net Profit of Four Major Financial Holding Companies Expected to Reach Around 3 Trillion Won in Q3
Loan Growth Rate High, Profitability of Banking Sector Improves

[Asia Economy Reporter Park Sun-mi] The third-quarter earnings of South Korea's four major financial holding companies are expected to perform well, defying concerns. Despite the domestic and international economic downturn caused by COVID-19 and the low interest rate environment, the continued boom in stock and real estate investments has driven strong growth in bank loans, yielding positive results.

According to the financial sector on the 16th, the combined net profit of the four major financial holding companies?KB, Shinhan, Hana, and Woori Financial? for the third quarter of this year is estimated to be around 3 trillion won. Although a year-on-year decline is inevitable, there is consensus that the results will improve compared to the first and second quarters.

This improvement is attributed to enhanced profitability in the banking sector, which accounts for about 70% of the total net profit of financial holding companies. Although the net interest margin (NIM) continued to decline in the third quarter due to the low interest rate trend caused by two rate cuts (75bp) this year, the rate of decline slowed, and the high loan growth rate likely offset the NIM decrease.

In fact, driven by a surge in jeonse deposit loans and unsecured loans in the banking sector, the overall household loan growth rate remains high. The Bank of Korea reported that the increase in household loan balances in the banking sector for the third quarter was 7.6428 trillion won in July, 11.7 trillion won in August, and 9.6 trillion won in September. The increases in household loans in August and September rank first and second historically. The rise in household loans in the banking sector reflects a mood of borrowing to invest amid the stock and real estate investment boom. Additionally, as loans to large corporations decreased, loans to small and medium-sized enterprises struggling due to COVID-19 filled the gap, maintaining overall household and corporate loan growth rates at around 2-3% compared to the previous quarter.

The improved third-quarter performance also reflects the impact of costs related to the private equity fund issue, which were already accounted for in the second quarter. Furthermore, one-time factors affecting third-quarter earnings include at least 150 billion won in bargain purchase gains from KB Financial's early subsidiary incorporation of Prudential Life Insurance, and approximately 60 to 70 billion won in non-cash foreign exchange gains from Hana Financial due to exchange rate declines.

Impact of Loan Growth Rate Adjustment in the Banking Sector?

The financial authorities' pressure to tighten loans is actually leading to a slowdown in loan growth in the banking sector, which could negatively affect bank profitability. In fact, 18 commercial banks, including internet banks, have submitted credit loan management plans to the Financial Supervisory Service to reduce the monthly average increase in unsecured loans to about 2 trillion won by the end of the year.

However, some expect that the profitability impact on banks will not be significant. Lee Byung-geon, a researcher at DB Financial Investment, predicted, "The loan growth rate in the banking sector will slow significantly in the fourth quarter," but added, "Since loan growth has been strong this year, the average balance of bank loan assets may continue to increase until the first half of next year, maintaining a steady net interest income."

Rather, warnings have been issued that banks need to prepare for financial risks that will fully emerge from next year. In the '2021 Financial Industry Outlook' released yesterday by Hana Financial Management Research Institute, it was advised that "next year, the financial sector's profitability will weaken due to sluggish recovery in non-interest income and increased credit costs," and that "preparation is needed for the spread of risks deferred due to COVID-19." It diagnosed that, despite proactive provisioning, concerns about potential bad debts remain high as some soundness indicators across the financial industry reflect illusionary effects.

Baek Jong-ho, a research fellow at Hana Financial Management Research Institute, said, "The banking sector needs risk management measures in preparation for after June next year, when maturity extensions, interest payment deferrals, and various regulatory ratio relaxations come to an end."

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