Financial Sector 'Mixed Fortunes' in 2022... Banks and Insurance 'Clear'... Cards and Savings Banks 'Cloudy'

Banks and Insurance Expected to Maintain Stable Profitability and Credit Ratings
Cards and Savings Banks Anticipated to Struggle Amid Various Regulatory Tightenings

A loan counter inside a bank in downtown Seoul.

[Asia Economy Reporter Kwangho Lee] The banking and insurance industries are expected to maintain stable profitability and creditworthiness next year. In contrast, the card and savings bank sectors are anticipated to face challenges.

On the 12th, Standard & Poor's (S&P) and NICE Credit Rating held a seminar on the 9th titled "Financial Industry and Corporate Sector Credit Risk Outlook," where they forecast that domestic banks will continue to maintain stable credit ratings next year.

Kim Daehyun, Director at S&P, stated, "While some European banking systems have continued to experience low profitability due to COVID-19, domestic banks are expected to maintain stable creditworthiness through improved profitability, sound asset quality, and loan loss provisions." He added, "We anticipate improvements in both the average Return on Average Assets (ROAA) and Net Interest Margin (NIM) for domestic banks this year and next. The ROAA is expected to approach 0.6%, which is higher than that of France, the UK, Germany, and Japan, and the non-performing loan ratio relative to total loans will remain below 1%, indicating sound asset quality."

Lee Hyukjun, Executive Director at NICE Credit Rating, also assessed the credit rating outlook for eight financial sectors, including banks, as 'stable,' noting, "The rising base interest rate environment is expected to improve profitability in the banking and insurance industries through margin expansion." He mentioned that the base rate hikes this year and next resemble the sharp increases during the 2010-2011 economic recovery period, during which banks and insurers experienced significant net income growth.

However, he reminded that the potential problem loan ratio within total bank loans, especially the combined portion of substandard loans and those with extended maturities or repayment deferrals, reached 5.8% as of the first half of this year. He cautioned, "We must remain open to the possibility that accumulated potential problem loans may become visible after financial support ends." Although asset quality is currently maintained through loan extensions and principal and interest repayment deferrals, both domestic and international credit rating agencies commonly express concerns about the future asset quality of banks.

On the other hand, the card industry faces a bleak outlook. Not only is profitability from core commission income expected to decline, but stricter regulations are likely to worsen profitability in card loans. Additionally, rising delinquency rates and the expanding influence of big tech companies threaten growth, leaving few effective solutions to counter profitability deterioration.

Korea Credit Rating, at a recent seminar titled "Post-COVID Non-Bank Financial Institution Risk Assessment," diagnosed that strengthened loan regulations will increase burdens on the card industry's scale growth and profitability. From next year, the Debt Service Ratio (DSR) will apply to card loans (long-term card loans), and total volume regulation limits will be lowered. They expect short-term increases in asset quality management burdens, indicating threats to both profitability and asset quality of card companies next year.

With an additional reduction likely in merchant fees during the upcoming fee recalculation at the end of this month, it has become more difficult to secure profitability even in loan products that had previously offset commission deficits due to regulatory tightening. Furthermore, delinquency rates, which had been stably managed, are also likely to rise. Wi Ji-won, Head of Structured Evaluation at Korea Credit Rating, expressed concern, saying, "With a high proportion of multiple debtors at 64.4% in card loans, the end of loan maturity extensions and interest repayment deferrals implemented during COVID-19 will likely lead to increased delinquency rates."

Savings banks, which experienced rapid growth during the COVID-19 period, are also expected to struggle next year. This is due to strengthened household loan volume regulations and DSR restrictions, as well as intensified competition even in the mid-interest loan market where they previously held relative advantages.

The total household loan volume limit for savings banks is set to decrease to 10.8-14.8% per company starting next year, about half of this year's limit of 21.1%. Since most savings banks have portfolios focused on the consumer finance market, without finding alternative revenue sources, their net income is structurally bound to decline sharply.

There is a strong call to expand corporate financing, but since this is essentially a new market for them, many difficulties remain. A savings bank official explained, "We have focused on retail finance, so although we aim to actively expand corporate financing, we lack the underwriting capabilities and data. Many small and medium-sized enterprises have become vulnerable after COVID-19 and the interest rate hike period, so excessively increasing corporate loans for business purposes is risky."

The most realistic option is to expand mid-interest loans, but even this is challenging. Competition with internet banks and online investment-linked finance companies is already fierce. It is known that financial authorities are considering incentives or exemptions from volume regulations specifically for mid-interest loans, which has attracted interest from commercial banks as well. Moreover, recent reductions in the maximum interest rate and lowering of mid-interest loan standards have made it harder to achieve previous profit levels. With base rate hikes increasing funding costs, there is a problem of needing to keep interest rates low in the mid-interest loan market.

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