Leverage and Debt Investment... 4 Major Financial Holding Companies Show Resilient Q3 Performance (Comprehensive)

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 the four major domestic 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 high growth in bank loans, producing positive effects.

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.

Expectations for Improved Profitability in the Banking Sector
Effect of Increased Loan Growth Rate

This reflects the improvement in 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) decline continued into 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 is expected to have offset the NIM decline.

In fact, the overall household loan growth rate remains high, driven by a surge in jeonse (key money deposit) loans and unsecured loans in the banking sector. 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 an overall household and corporate loan growth rate of around 2-3% compared to the previous quarter.

The improved third-quarter results also reflect the impact of costs related to the private equity fund issue, which were already accounted for in the second quarter. Furthermore, one-time factors reflected in the third-quarter earnings of each bank are expected to contribute to performance improvement, such as KB Financial's minimum 150 billion won or more bargain purchase gains from the early subsidiary incorporation of Prudential Life Insurance, and Hana Financial's non-cash foreign exchange gains of about 60 to 70 billion won due to exchange rate declines.

Impact of Loan Growth Rate Adjustment in the Banking Sector?

The pressure from financial authorities to tighten loans is actually manifesting as a slowdown in the loan growth rate in the banking sector, which could be a variable that negatively affects 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 from this 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 also noted, "Since bank loan growth has been high this year, the average balance of bank loan assets may maintain an increasing trend until the first half of next year, sustaining a solid net interest income flow."

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