Financial Research Institute "Domestic Banks' Net Profit Expected to Decrease Next Year... Need to Establish Soundness Policies"

Korea Institute of Finance, '2021 Financial Trends and 2022 Outlook Seminar'

[Asia Economy Reporter Song Seung-seop] Despite the explosive growth of domestic banks, there is a forecast that net income may decline next year. This is due to the expected increase in loan loss provisions as the COVID-19 exit strategy and financial support measures come to an end. Advice has been given that private financial companies need to improve profitability and manage risks in response to the rapidly changing financial environment.

On the 8th, Kim Young-do, Head of the Banking and Insurance Research Division 1 at the Korea Institute of Finance, stated at the '2021 Financial Trends and 2022 Outlook Seminar' hosted by the Korea Institute of Finance, “Net income of domestic banks in 2022 (16.8 trillion won) is expected to slightly decrease compared to this year (17.9 trillion won).”

Kim Young-do said, “Interest income is expected to increase by 7.6% compared to this year due to overall loan growth and the expansion of net interest margin (NIM) from rising interest rates,” but analyzed, “If the maturity extension and repayment deferral measures end in March next year, the impact will become visible in the second half.” He predicted that loan loss provisions will reach 8 trillion won next year, an increase of 2 trillion won from this year.

He also suggested, “It is necessary to establish management strategies and soundness policies by fully considering the medium- to long-term impact on asset quality from the end of COVID-19 financial support and the ongoing credit expansion phase.”

There were also voices that significant changes in the macro and financial environment will take place. Kim said, “Pressure for interest rate hikes is increasing, and with the end of financial support, deterioration of banks’ asset quality and changes in the management environment will become visible,” adding, “The recent rapid increase in household loans has emerged as a major issue for banks, which are the main channel for household loan supply.”

Measures Needed for Consumer Protection and Risk Management

In addition, he pointed out that resolving legal uncertainties following the enforcement of the Financial Consumer Protection Act, the new banking ecosystem formed by the expansion of platform companies into finance, and the goals and related legislation for moving toward a low-carbon economy are factors that will affect the banking industry.

He advised that to successfully carry out new management tasks, the overall management stance should be set to enhance profit efficiency and strengthen effective cost management. He also argued that trust should be increased through financial consumer protection and social role sharing of finance, and that the responsible finance stance should be established and reinforced.

Kim said, “Specifically, risk management following the implementation of the exit strategy, diversification of revenue sources for medium- to long-term growth, strengthening digital competitiveness, establishing a financial consumer protection and ESG (environment, social, governance) management system should be planned and executed,” adding, “To flexibly respond to uncertainties in the exit strategy implementation, scenario-based management strategies should be established, and proactive risk management and measures to prepare for asset quality deterioration are necessary.”

He continued, “In the medium to long term, the service competitiveness of domestic banks should be enhanced through active promotion of long-term tasks such as expanding asset management services, strengthening corporate finance services to enhance intermediary functions, and expanding external services,” emphasizing, “In particular, efforts to secure relative competitive advantages such as strengthening platform service capabilities to gain an edge in competition with big tech companies, and enhancing security capabilities to maintain trust should be pursued simultaneously.”

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