4 Major Financial Groups Smile at Strong Earnings... Securities Affiliates Sigh

Non-bank Sector's Contribution to Net Profit Slows Down

[Asia Economy Reporter Yu Je-hoon] Due to the impact of the base interest rate hike, the performance of securities subsidiaries of major domestic financial holding companies is showing a clear downward trend. The financial sector predicts that the base interest rate hikes will continue at least until the end of this year, and possibly into next year, so the poor performance of securities affiliates is expected to continue for the time being.

According to the financial sector on the 23rd, the net income of securities subsidiaries of KB, Shinhan, and Hana Financial Groups in the first half of this year decreased by about 40-50% compared to the same period last year. KB Securities recorded 182 billion won, down 51.4%, Shinhan Financial Investment decreased by 41.4% to 189.1 billion won, and Hana Securities remained at 139.1 billion won, down 49.6%.

KB Financial stated, "Due to the increase in interest rates and the decline in stock indices, the volatility of the financial market has expanded, resulting in increased bond operation losses and decreased ELS self-hedging profits, leading to an overall poor performance in sales and trading (S&T). Additionally, the decrease in stock trading volume has reduced custody fees." Shinhan Financial also explained, "The stock market downturn led to a decrease in securities trading volume, which in turn reduced securities custody fees. The rise in market interest rates also negatively affected profits related to marketable securities."

Since the COVID-19 pandemic, securities subsidiaries of major financial holding companies have experienced high growth based on abundant market liquidity. Naturally, they played a role in driving growth in the non-bank sectors within their groups. In fact, last year, the contribution of the non-bank sector to net income of the top five domestic financial holding companies (KB, Shinhan, Hana, Woori, NH Nonghyup) increased by 0.8 to 9.2 percentage points (p) for each company.

The reason these securities affiliates, which had been performing well, received poor results is that the securities market froze due to the impact of interest rate hikes that began last year. The KOSPI index, which rose to the 3300 level last year, closed at 2393.14 on the 22nd, down about 27% from the previous year's peak. Investor sentiment is also cooling rapidly. As of the 21st, the balance of customer deposits with the nature of stock purchase standby funds was about 56 trillion won, down about 21% from the beginning of the year (about 71 trillion won).

The financial sector believes that this unfavorable business environment is likely to continue in the second half of the year. Although the IB (Investment Banking) and asset management sectors continue to grow steadily, since further base interest rate hikes are expected until the end of the year, the decline in custody fee income due to reduced stock trading volume is inevitable. NICE Credit Rating Agency recently noted in a report, "The securities industry experiences money movement according to interest rate changes, which affects performance. As inflationary pressures persist and uncertainty about the upper limit of the base interest rate continues, the contraction of the brokerage sector and the expansion of operating losses are expected to maintain pressure on profitability."

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