[Initial Insight] Why Banks That Make Big Profits Are Not Welcomed

[Asia Economy Reporter Song Hwajeong] Banks recorded record-high earnings last year. The net profits of the five major financial holding companies?KB, Shinhan, Hana, Woori, and NH Nonghyup Financial Group?exceeded 16 trillion won.

Samsung Electronics, SK Hynix, LG Electronics, and others also achieved their highest-ever sales last year, creating an encouraging atmosphere with 'earnings surprises' even amid the COVID-19 pandemic. Articles praising their strong performance despite difficult circumstances dominated the news.

On the other hand, the public's view of the banks' strong performance is cold. Negative opinions prevailed, criticizing the record profits as being made through 'interest business' and 'interest games,' accompanied by lavish bonuses and dividend distributions.

This temperature gap stems from the interest income that formed the foundation of the banks' record earnings. Last year, the interest income of the five major financial holding companies reached 43 trillion won. With loans increasing due to COVID-19 and low interest rates, and interest rates rising, interest income expanded. In particular, banks raised the additional interest rates while lowering preferential rates, causing loan interest rates to rise sharply, whereas deposit interest rates remained at similar levels, further widening the interest rate spread between loans and deposits. As a result, ordinary citizens struggled to repay loan interest, and criticism poured in accusing banks of profiteering through interest business. Conscious of such criticism, the political sphere has even proposed bills and pledges to limit the interest rate margin.

There is another reason why bank performance is scrutinized more strictly. Banks are regulated industries, and during past crises, massive public funds were injected. Banks face entry regulations and must meet certain requirements and obtain approval from financial authorities to be established, limiting competition. Additionally, during the 1997 IMF economic crisis and the global financial crisis, massive public funds were injected to prevent insolvency. After the 1997 International Monetary Fund (IMF) economic crisis, public funds injected to prevent financial company insolvency amounted to 168.7 trillion won. Of this, 86.9 trillion won went to banks, and 79.4 trillion won to the secondary financial sector. From the public’s perspective, since taxpayers’ money was used to rescue banks, greater expectations for their public role are inevitable.

However, banks are clearly listed companies with shareholders and are private enterprises. It is natural for them to strive to maximize corporate and shareholder profits. Although financial holding companies posted favorable results in 2020 as well, when financial authorities recommended limiting banks’ dividend payout ratios to within 20%, shareholders expressed dissatisfaction, even filing petitions to the government.

It is undeniable that banks embody both commercial and public characteristics. Although not easy, banks need to make efforts to balance these two roles well. First, they need to be more proactive in social contribution and sharing hardships. Also, efforts to resolve public dissatisfaction through reasonable calculation of the interest rate spread between loans and deposits seem necessary. Banks should avoid being accused of focusing excessively on raising loan interest rates while barely increasing deposit rates to boost interest income. While dividend payments and bonuses are appropriate for companies, considering their public nature, banks should also take social expectations into account so that these do not cause social alienation or become grounds for criticism.

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