Financial Research Institute: "Domestic Banks Face Loan Losses, Regulatory Costs, Ultra-Low Interest Rates, and Digital Competition"

Financial Research Institute, 2021 Banking Industry Outlook and Management Challenges Report
"Risk Management, Discovery of New Revenue Sources, Maximizing Digital Competitiveness"

[Asia Economy Reporter Kangwook Cho] This year, domestic banks are expected to face risks such as increased loan loss provisions and regulatory costs, continued ultra-low interest rates, and intensified competition in digital channels.

Seobyungho, Senior Research Fellow at the Korea Institute of Finance, stated in the report "2021 Banking Industry Outlook and Management Tasks" on the 2nd that "Domestic banks need to strengthen risk management while discovering new revenue sources suitable for the ultra-low interest rate era and enhancing competitiveness in digital channels."

According to the report, last year the banking industry faced the "three lows" phenomenon of low interest rates, low growth, and low birth rates, followed by disintermediation due to the 4th Industrial Revolution, and then the major adverse event of COVID-19.

In particular, loan loss provisions had a decisive impact on the profitability of domestic banks. From January to September last year, loan loss provisions of domestic banks increased by 42.9% (2.1 trillion KRW) compared to the same period the previous year. As a result, the net income of domestic banks decreased by 17.5% (1.8 trillion KRW) from 12.1 trillion KRW in January-September 2019 to 10.3 trillion KRW in the same period last year. During this period, the representative profitability indicator of domestic banks, Return on Equity (ROE), fell by 83 basis points from 7.11% to 6.27%.

Research Fellow Seo predicted that the management environment for domestic banks this year would also not be favorable. He pointed out that due to the increase in loan loss provisions and regulatory costs, the continuation of ultra-low interest rates, and the intensification of competition in digital channels, it will be difficult to manage immediate business performance, and there is concern about customer attrition.

First, if the restructuring of corporate loans, the automatic extension of loan maturities and suspension of principal and interest repayments end, and the deferred loan defaults on commercial real estate and small business loans worth 120 trillion KRW materialize, there is a possibility of a sharp increase in loan loss provisions.

Also, with the Financial Consumer Protection Act coming into effect in April this year, costs related to compliance with regulations on sales activities, such as prohibition of unfair sales practices and advertising regulations, will inevitably increase.

Ultra-low interest rates in the 0% range are expected to continue this year, and as competition with big tech companies in digital channels intensifies, there is a possibility of customer attrition during the response process.

Accordingly, Research Fellow Seo emphasized, "In the prolonged phase of the COVID-19 crisis, survival and stability require appropriate risk management while discovering new revenue sources that can respond to the ultra-low interest rate era." He added, "Furthermore, banks must maximize competitiveness in digital channel competition."

Regarding credit risk, he advised expanding the proportion of installment repayments in household loans, especially credit loans, to induce voluntary deleveraging by borrowers. He also pointed out that strengthening the pre-review function for sales products is urgent for managing regulatory risks.

He stressed the need to create new revenue sources through testamentary trusts and similar products. These are services most needed by customers amid population aging and are currently under regulatory relaxation review by supervisory authorities. He also noted that to compete with big tech, banks must improve customer satisfaction with their own platforms or apps.

Research Fellow Seo explained, "This is the shortcut for banks to provide customized total care services by understanding the detailed needs of individual customers," and concluded, "Ultimately, this is the path domestic banks must take to compete against big tech and others."

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