Financial Holding Companies Scaling Up to 3,000 Trillion Won, Strong Q1 Results Expected (Comprehensive)

Financial subsidiaries such as securities post strong results
Banks also benefit from net interest margin (NIM) recovery due to rising interest rates

[Asia Economy, Park Sunmi] Domestic financial holding companies are expected to continue their record-breaking profit streak in the first quarter of this year. This is due to the ongoing trend of "debt-fueled investing" (investing with borrowed money), which is boosting the performance of non-banking subsidiaries, as well as banks benefiting from a recovery in net interest margin (NIM) driven by rising interest rates. However, the financial sector remains uneasy despite the prospect of record-high earnings, as political circles are pressuring financial institutions to participate in profit-sharing schemes, and stricter household debt management measures are set to be announced later this month.

Financial Holding Companies Perform Well... Combined Net Profit of Top Four Expected to Rise 15%

According to the financial industry on April 6, the combined net profit of the top four financial holding companies in the first quarter of this year is projected to reach 3.2428 trillion won, easily surpassing 3 trillion won and representing an increase of about 15% compared to 2.8371 trillion won in the same period last year. Market consensus figures compiled by financial information provider FnGuide for first-quarter net profit attributable to controlling shareholders are as follows: Shinhan Financial Group at 1.0368 trillion won, KB Financial Group at 1.0237 trillion won, Hana Financial Group at 695.5 billion won, and Woori Financial Group at 486.8 billion won.

Only Woori Financial Group is expected to see a 6.06% year-on-year decrease in net profit, while Shinhan, KB, and Hana are forecast to post increases of 11.20%, 40.33%, and 5.86%, respectively. The combined operating profit of the four major financial holding companies is also estimated to approach 4.5 trillion won, more than 10% higher than the 3.9488 trillion won recorded in the first quarter of last year. In particular, Shinhan and KB, which are competing for the leading bank position, are expected to see operating profit growth rates of 14.78% and 33.32%, respectively.

The strong first-quarter results are being driven by the continued stock market boom since last year, which has boosted the performance of non-banking subsidiaries such as securities firms. At the same time, banks, which had been unable to generate much profit from increased lending due to the prolonged low interest rate environment, are also seeing improved earnings. This is because high loan growth and rising NIM are significantly improving banks' net interest income, and with almost no additional provisions required in the first quarter, credit loss expenses are expected to decrease further.

Choi Jungwook, a researcher at Hana Financial Investment, said, "Corporate loans in the banking sector are steadily increasing, and household loans, especially for jeonse (long-term housing leases) and unsecured credit, are also on the rise. As a result, the average loan growth rate for banks in the first quarter is expected to exceed 2.0%." He added, "With loan growth continuing, the average NIM for banks in the first quarter is expected to rise by more than 0.04 percentage points, marking a turnaround after 12 quarters."

[Image source=Yonhap News]

Financial Holding Companies Face Regulatory Hurdles Despite Strong Q1 Outlook

However, despite the forecast of strong first-quarter results, financial holding companies cannot afford to be entirely optimistic.

Financial authorities are proceeding with disciplinary actions against management in connection with the private equity fund scandal, and the implementation of the Financial Consumer Protection Act has made it even more difficult for financial companies to sell products compared to before. Due to concerns over excessive "Yeongkkeul" (leveraging every possible resource) and "debt-fueled investing," the government is set to announce household loan advancement measures this month that will include stricter lending regulations. In addition, with an amendment to the People’s Finance Act coming in July, the financial sector's annual contribution to policy-based finance for low-income households will increase by 200 billion won per year, totaling 1 trillion won over the next five years. Separately, the government and political circles are also pressuring financial institutions to participate in profit-sharing schemes.

Amid these tightened regulations, financial holding companies are also concerned about big tech (large information technology companies) entering the financial industry, which threatens the traditional core businesses of banks.

Reflecting these concerns, financial holding companies are calling for regulatory changes that would allow them to independently establish internet-only banks in response to big tech competition. Recently, the Korea Federation of Banks surveyed financial holding companies regarding their demand for establishing internet banks, and the results will soon be shared with financial authorities for further discussion.

Total Assets of Financial Holding Companies Near 3,000 Trillion Won Last Year... Up 12% in One Year

Meanwhile, the total assets of domestic financial holding companies increased by 12% last year, nearing 3,000 trillion won. According to the "2020 Financial Holding Company Management Performance" report released by the Financial Supervisory Service on this day, the consolidated total assets of 10 financial holding companies-KB, Shinhan, NongHyup, Hana, Woori, BNK, DGB, JB, Korea Investment Holdings, and Meritz-reached 2,946.3 trillion won, an increase of 317.7 trillion won from 2,628.6 trillion won at the end of the previous year. The asset growth rate was 12.1%.

Over the past three years, the proportion of consolidated total assets of financial holding companies relative to the total assets of all domestic financial companies (banks, insurance, financial investment, credit finance, savings banks, mutual finance, and standalone financial holding companies) has gradually increased: from 38.9% at the end of 2018, to 45.8% at the end of 2019, and 46.3% at the end of 2020.

Last year, the consolidated net profit of financial holding companies was 15.1184 trillion won, a decrease of 1.154 trillion won (-0.8%) from 15.2338 trillion won in the previous year. By subsidiary sector, banks saw a decrease of 1.202 trillion won (-10.4%) due to increased loan loss provisions and costs related to private equity funds. In contrast, financial investment companies posted an increase of 232.5 billion won (+7.6%) due to higher fee income from the bullish stock market, insurance companies increased by 355.5 billion won (+35.4%), and credit finance companies and others grew by 456.9 billion won (+23.2%).

A Financial Supervisory Service official stated, "We will continue to ensure the stable management of the financial system by monitoring the management strategies, asset soundness, and capital adequacy of financial holding companies." The official added, "To prepare for the end of COVID-19 policy support, we will encourage the development of internal response measures such as strengthening preemptive monitoring of vulnerable borrowers, and will also guide financial holding groups to enhance consumer protection and risk management at the group level."

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