[2021 Financial Sector Review] Record-Breaking Performance Despite COVID-19... Banks Anticipate Dividend Bonanza

① Banks - Top 4 Banks Likely to Easily Surpass 2 Trillion Won in Net Profit
Interest Income 34 Trillion Won, Household Debt Provides Windfall
Uncertain if Growth Will Continue Next Year

[Asia Economy Reporter Kiho Sung] Although the impact of COVID-19 persists, the banking sector experienced a warm year again this year by recording the highest-ever performance. Due to the surge in real estate prices and the effects of COVID-19, household debt increased exponentially, and with the subsequent rise in the base interest rate, profits naturally flowed back to the banking sector. However, with the government announcing strong household debt control policies for next year as well, it remains uncertain whether this growth trend can continue.

The Four Major Banks on the Verge of Joining the '2 Trillion Won Club'

According to the financial sector, among the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup), the top four are expected to exceed 2 trillion won in net profit this year. As of the third quarter, KB Kookmin Bank and Shinhan Bank have already surpassed 2 trillion won in cumulative net profit, with 2.2003 trillion won and 2.1301 trillion won respectively. They are fiercely competing for the 'leading bank' position again this year, following last year.

Woori Bank and Hana Bank are on the brink of entering the '2 trillion won club.' Woori Bank recorded a cumulative net profit of 1.9867 trillion won in the third quarter, a remarkable 71.4% increase from 1.1586 trillion won in the same period last year, marking the highest growth among the five major banks. Hana Bank also recorded 1.947 trillion won, a 17.6% increase compared to the same period last year. NH Nonghyup Bank showed growth of 10.9% with 1.2375 trillion won as of the third quarter.

The rapid increase in net profits in the banking sector is attributed to factors such as ▲ the spread of COVID-19 ▲ the surge in real estate prices ▲ and the sharp rise in household loans due to 영끌 (borrowing to the limit) and 빚투 (debt-financed investment). The increase in household loans led to a significant rise in banks' interest income.

According to the Financial Supervisory Service, the interest income of the five major banks reached 33.7 trillion won by the third quarter this year, an increase of 2.9 trillion won compared to the same period last year. The spread between deposit and loan interest rates was 1.80% as of the third quarter, 0.4 percentage points wider than the previous year.

Additionally, the Bank of Korea raised the base interest rate twice this year and plans further hikes next year. This underpins the industry's expectation of continued strong performance next year. On the 25th of last month, Lee Ju-yeol, Governor of the Bank of Korea, stated, "A base interest rate of 1.00% is still accommodative," and added, "The possibility of a rate hike in the first quarter of next year cannot be ruled out."

Thanks to the banks' strong performance, the four major financial holding companies (KB, Shinhan, Hana, and Woori) are expected to hold a 'dividend feast.' Industry estimates suggest that the dividend amount will reach a record high of around 3.9 trillion won. This is due to the lifting of the financial authorities' 'dividend restriction' regulations and the significant increase in profits, which has expanded dividend capacity.

[Image source=Yonhap News]

Authorities Tighten Household Loans... Borrowing Becomes Difficult

As household loans showed an endless upward trend this year, the financial authorities drew the sword by announcing the 'Household Loan Management Plan' on April 29. Banks were given a target growth rate for household loans of around 5-6% compared to the previous year.

Following the financial authorities' management plan, banks took measures such as suspending loans and reducing limits, which immediately led to a loan cliff. For example, Toss Bank, an internet-only bank launched in October, stopped lending just nine days after starting operations.

Despite these measures, as household loan growth continued, the financial authorities announced the 'Strengthened Household Debt Management Plan' on October 26. The key point is to advance the second phase of the borrower-level Debt Service Ratio (DSR) scheduled for July next year to January for early application.

DSR is the ratio of a borrower's total loan principal and interest repayments across all financial institutions to their annual income. Loan limits are determined based on this ratio. As a result, from next year, borrowers with total loans exceeding 200 million won will be subject to a DSR limit of 40% when applying for new loans, and from July, this will apply to those exceeding 100 million won.

Accordingly, borrowing will become even more difficult starting next month. A bank official said, "For borrowers who already have loans, most will inevitably exceed the 40% DSR when trying to get additional loans," and added, "From July, it will be virtually impossible for most borrowers with existing loans to obtain new loans."

The continuous rise in interest rates is also a burden for borrowers. According to the Korea Federation of Banks, the COFIX (Cost of Funds Index), which serves as the benchmark for variable-rate mortgage loans, stood at 1.55%, marking the largest increase since its disclosure began. The new COFIX has been rising for six consecutive months since May this year. The variable mortgage rates at the five major commercial banks range from 3.73% to 5.06%. Having already exceeded 5%, there are predictions that rates could surpass 6% next year.

Another bank official said, "If the base interest rate rises, the maximum variable mortgage rate could approach 6% in the first half of next year," and added, "Due to the sharp rise in loan interest rates, inquiries about fixed-rate products at branch counters have increased."

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