Tightening Loans Is Okay... Financial Holding Companies See Rosy Outlook for Q3 (Comprehensive)

Bank Loans Continue to Rise...Margins Expand Due to Market Interest Rate Increase

[Asia Economy Reporter Park Sun-mi] Domestic financial holding companies are expected to achieve record-high earnings again in the third quarter of this year, despite the continued spread of COVID-19. Although there is tightening of loans due to strengthened total household loan management, the average loan balance has already increased significantly, and the margin expansion caused by rising market interest rates is also contributing.

According to the financial sector on the 6th, the net profit of the four major financial holding companies in the first quarter of this year is estimated to be around KRW 3.8651 trillion, an 8.8% increase from KRW 3.5499 trillion in the same period last year. The market consensus for the net profit attributable to controlling shareholders of the four major financial holding companies, compiled by financial information provider FnGuide, is ▲ KB Financial KRW 1.2038 trillion ▲ Shinhan Financial KRW 1.1363 trillion ▲ Hana Financial KRW 852.5 billion ▲ Woori Financial KRW 672.5 billion, respectively.

KB Financial faced a challenging environment for a significant increase in third-quarter net profit this year due to the KRW 145 billion bargain purchase gain related to the acquisition of Prudential Life Insurance reflected in the third quarter of last year. However, with a 3.19% growth rate, it is widely expected that the third-quarter net profit will surpass KRW 1.2 trillion, following the first and second quarters.

Shinhan Financial, which exceeded KRW 1 trillion in quarterly net profit for the first time in its history in the third quarter of last year, is also expected to achieve net profit exceeding KRW 1 trillion in the third quarter of this year. If this continues, both KB Financial and Shinhan Financial are expected to easily surpass KRW 4 trillion in total net profit for the first time this year.

Hana Financial and Woori Financial are expected to see double-digit net profit growth rates in the third quarter. In particular, Woori Financial, which has a higher bank ratio compared to other financial holding companies, is estimated to increase its net profit by about 40% year-on-year due to a sharp rise in interest income from loan interest rate increases and recognition of KRW 70 billion in equity-method valuation gains related to K Bank’s capital increase.

Continued Increase in Net Interest Income in the Banking Sector
Effect of Loan Interest Rate Rise Due to Base Rate Hikes

Despite the reduction of credit loan and overdraft limits to within annual income and KRW 50 million respectively, and the suspension and reduction of new real estate mortgage loans, household loans continue to increase. The household loan balance of the four major banks stood at about KRW 567.35 trillion at the end of the third quarter, nearly KRW 12 trillion higher than KRW 555.4823 trillion at the end of the second quarter. Rather, the rise in loan interest rates, which is inevitable for household debt management, creates an environment where net interest income in the banking sector must continue to increase.

Since mid-September, the effect of loan interest rate increases due to base rate hikes has been occurring, and the liquidity coverage ratio (LCR) relaxation (from 100% to 85%) has been extended again, increasing the possibility of further improvement in net interest margin (NIM). Even if the bank NIM in the third quarter remains similar to the second quarter, it is predicted that a 3 to 4 basis point improvement is possible in the fourth quarter. Additionally, although loan maturity extensions and principal and interest repayment deferral programs for small and medium-sized enterprises and small business owners are ongoing, the possibility of large-scale losses is low due to the COVID-19 related provisions accumulated last year.

The launch of internet-only banks such as Toss Bank is not a threat to the performance of commercial banks. The mid-interest rate loan customers that Toss Bank aims to secure are not the main targets of existing commercial banks, and there is no reason for competition in high-credit loans amid the current atmosphere of strengthened household debt management.

Baek Doo-san, a researcher at Korea Investment & Securities, explained, "Economic recovery and monetary policy adjustments to resolve financial imbalances will lead to improved bank performance," adding, "The focus for third-quarter results should be on base rate hikes rather than household debt management." He also forecasted, "Considering that base rate hikes will not be a one-time event and the mismatch between borrowing demand and total loan management affects pricing power, the upward trend in NIM is expected to continue at least until next year."

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