Pressure from 'Ijajangsa' and burden of securing loan loss provisions... Financial holding companies' net profit expected to slow down

Despite Interest Rate Hike Outlook... Authorities Pressure Banks Over 'Interest Profiteering'
Expect Burdens Like Disclosure of Loan-Deposit Rate Gap and Provisioning for Loan Losses

[Asia Economy Reporter Minwoo Lee] Financial holding companies that recorded their highest-ever performance in the first quarter of this year are expected to see their earnings growth slow down starting in the second half of the year. Although the base interest rate continues to rise, ongoing pressure from authorities to lower loan interest rates is expected to act as a burden.

According to financial information analysis firm FnGuide on the 8th, the combined market consensus for net profit in the second quarter of this year for the four major domestic financial holding companies?KB, Shinhan, Hana, and Woori?is 4.5636 trillion KRW. This is 7.7% higher than the same period last year but about 2.3% lower than the previous quarter’s record high of 4.672 trillion KRW.

Excluding Hana Financial Group, which reflected voluntary retirement costs in the first quarter, all companies are expected to see a decrease in net profit. Securities affiliates are inevitably facing a decline in operating profit due to the weak market, and bank affiliates also need to set aside additional provisions. Choi Jung-wook, a researcher at Hana Securities, said, "With credit risk expanding due to the sharp rise in market interest rates, and the supervisory authorities demanding an increase in loan loss provisions to improve soundness, banks are expected to reflect this significantly. It is estimated that about 1 trillion KRW of additional provisions will be set aside in the second quarter, so while the conservative consensus for bank earnings in the second quarter may be exceeded, a decrease compared to the first quarter is highly likely."

There is also analysis that, excluding profits from real estate sales, actual performance may be worse than in the second quarter of last year. The industry expects that about 130 billion KRW from the sale of KB Insurance’s office building and 400 billion KRW from Shinhan Financial Investment’s office building sale profits will be reflected in the second quarter results this year.

The upward trend may also slow somewhat in the second half of the year. According to FnGuide, the consensus for net profit of the four major financial holding companies in the third quarter is 4.6302 trillion KRW. KB Financial and Shinhan Financial, the top two in the industry, are expected to see a decrease compared to the previous quarter. Although corporate loans remain steady, the balance of relatively high-interest household loans is declining. As of the end of last month, the household loan balance of the four major banks?KB Kookmin, Shinhan, Hana, and Woori?stood at 565.295 trillion KRW, decreasing for six consecutive months this year and dropping by more than 7 trillion KRW.

Additionally, pressure from authorities’ criticism of ‘interest profiteering’ is also a burden on expanding interest income. It has become difficult to raise loan interest rates as much as deposit interest rates. Shinhan Bank and Hana Bank have already begun proactively offering interest rate reduction benefits on mortgage loans and personal business loans in response to regulatory concerns.

The Financial Services Commission’s announcement yesterday on improving the interest rate information disclosure system adds further uncertainty to the future interest rate spread between deposits and loans. The disclosure cycle for the interest rate spread will be shortened from three months to one month, and for household loans, separate disclosures will be made by credit score segments, intensifying competition among banks. Furthermore, changes are expected in the calculation system for the additional interest rate. The new government’s first regulatory measure related to the banking sector reflects an intention to protect financial consumers in a rising interest rate environment and to limit excessive expansion of the interest rate spread by banks.

Jeon Bae-seung, a researcher at Ebest Investment & Securities, analyzed, "It is somewhat fortunate for banks that the level and detailed figures of the additional interest rate are excluded from disclosure, but in a situation where concerns about economic slowdown are growing, it may be difficult for increased credit risk to be fully reflected in loan interest rates. If the current financial authorities’ demands for additional provisions and measures to suppress the interest rate spread continue simultaneously, it will inevitably have a negative impact on the banking sector’s profitability."

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