[Initial Insight] Why Financial Holding Companies Can't Smile Despite Record-Breaking Earnings

[Asia Economy Reporter Kwangho Lee] Domestic financial holding companies posted record-breaking earnings in the first half of this year. The combined net income of the five major financial holding companies?KB, Shinhan, Hana, Woori, and NH Nonghyup?reached approximately 9.3 trillion won. KB Financial’s net profit was 2.4743 trillion won, up 44.6% from a year ago, and Shinhan Financial also increased by 35.4% to 2.4438 trillion won. Hana Financial (1.7532 trillion won), Woori Financial (1.4197 trillion won), and NH Nonghyup Financial (1.2819 trillion won) rose by 30.2%, 114.9%, and 40.8%, respectively.

However, despite these results, financial holding companies are not celebrating. First, the significant increase in net profit is due to rising market interest rates boosting banks’ interest income and increased fee income from non-bank sectors such as securities, cards, and insurance. Conversely, this implies that they earned huge profits through debt-financed investments (debt investment) and borrowing to the limit (borrowing up to the soul), which can be criticized as profiting while households struggle under heavy debt burdens. In other words, while households are drowning in debt, financial holding companies are fattening their profits through interest income, leading to criticism and a tendency to keep quiet.

Second, the spread of COVID-19 continues unabated despite the escalation of social distancing measures. If the fourth wave prolongs, the loan maturity and interest repayment deferral measures, scheduled to end at the end of September, may be extended once more. As of the end of December last year, COVID-19-related loans across all banks?including commercial, specialized, and regional banks?amounted to 251 trillion won. The new loans provided as COVID-19 support totaled 125.4 trillion won, and extended loans and interest repayments amounted to 125.7 trillion won. Among these, the total amount of loans and interest extended by the five major banks?Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?currently stands at 108.2592 trillion won. This includes 99.7914 trillion won in extended loans, 8.4129 trillion won in installment payments, and 54.9 billion won in interest.

The financial authorities have stated they will make a decision next month after monitoring the quarantine situation further. If an extension is decided, financial holding companies that posted record earnings have no grounds to ignore it. While financial holding companies agree on the need to cooperate during economic difficulties, they believe that even if the principal and interest repayments of loans for small and medium-sized enterprises and small business owners are deferred again, loan smooth landing or restructuring is necessary for companies with interest deferrals. This is because companies or small business owners who cannot even pay interest are already considered at the limit or high-risk borrowers, and supporting them could be like pouring water into a bottomless pit.

Third, the political sphere may once again demand a “populist bill” citing the record earnings. Politicians have often presented bills whenever financial holding companies posted strong results. Earlier this year, when financial holding companies made significant profits, they pressured them to participate in profit-sharing schemes, and in May, the “Act on Supporting Financial Life for the Underprivileged” was passed, requiring financial companies to contribute 200 billion won annually for five years to support low-income financial services.

Already, Gyeonggi Province Governor Lee Jae-myung is tightening the financial holding companies with his “basic series” (basic income, basic finance, basic housing). The basic loan is a pledge to provide up to 10 million won in low-interest loans at 3% annually to youth aged 19 to 34, and related amendments to the Low-Income Financial Act and Regional Credit Guarantee Foundation Act have already been proposed in the National Assembly.

Additionally, five bills proposing to lower the maximum interest rate to 10-15% are currently pending, and the “Bank Debt Forgiveness Act,” which reduces bank loan payments during disaster situations, is also under review by the Standing Committee on Political Affairs.

With the presidential election next year approaching, populist bills and policies aimed at winning votes are expected to pour in regardless of party lines. The more money financial holding companies make, the greater the risks they face.

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