"Regulations on Mid-Interest Loans by Internet Banks... Positive News for Bank Stocks"

[Asia Economy Reporter Ji Yeon-jin] It is analyzed that regulations on mid-interest rate loans for internet banks will weaken the core competitiveness of the internet-only banking industry.

According to the financial investment industry on the 30th, financial authorities recently announced a plan to expand the loan ratio for mid- to low-credit borrowers by internet-only banks. They required increasing the ratio of mid- to low-credit loans below grade 4, excluding the Seoul Guarantee Insurance Sa-it-dol loans with 100% principal guarantee, to 30% by 2023, and mandated quarterly disclosure of compliance. They also decided to reflect non-compliance in business licensing reviews while monitoring the implementation status.

The strengthening of regulations on internet-only banks by financial authorities is evaluated as an inevitable measure to mitigate side effects caused by operating mainly with high-quality customers in grades 1 to 3, contrary to the original purpose of establishment. In fact, the proportion of grades 1 to 3 in internet-only banks is 84.4%, significantly higher than the domestic bank average of 75.8%. Even for Sa-it-dol loans, which are mid-interest rate loans, the proportion of grades 1 to 3 is 66.4%, showing a very high ratio of high-quality customers contrary to the product’s intent.

This expansion of mid-interest rate loans for internet-only banks is expected to have a negative impact on profitability. The mid-interest rate market was 14 trillion won as of the end of last year, and due to its inherent characteristics, the market size is not large and profitability is low because of a high-cost structure. Furthermore, with the establishment of the Financial Consumer Protection Act, the market size is expected to shrink further. This is because a significant portion of grades 4 and 5 are borrowers with insufficient financial history or special cases whose creditworthiness is difficult to assess. Proper evaluation requires massive investment not only in proprietary CSS models but also in complex credit procedures and measures, and additional costs such as system installation and extra personnel expenses for evaluation are expected to be incurred.

On the other hand, due to the nature of banks, it is difficult to properly reflect potential future loan loss costs and increasing administrative expenses in pricing (interest rates), which is expected to act as a considerable cost burden factor from the perspective of internet-only banks. Additionally, setting limits on mid-interest rate loans is expected to restrict the growth rate of existing loans such as unsecured loans to high-quality customers, negatively affecting the growth of existing loans.

If mid-interest rate loans cannot be properly increased due to concerns about profitability and soundness deterioration, most internet-only banks are expected to try to achieve targets by lowering the growth rate of existing loans.

Meanwhile, government regulations on internet-only banks are expected to have a very positive impact on the existing banking industry. The weakening of competitiveness of internet-only banks, which recently caused intensified competition among banks, will shift the industry environment to a bank-led market (Sellers’ Market), continuously improving profitability such as margin enhancement. Seo Young-su, a researcher at Kiwoom Securities, said, "Considering that the stock prices of traditional banks have sharply declined after the growth of internet-only banks and platform companies, this is an absolute positive factor in terms of valuation," and added, "we maintain an overweight opinion on the banking sector."

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