Hana Financial Research Institute "Concerns Over Weakening Soundness Due to Low Growth... Need for Risk Management in the Financial Industry"

Stagnant Industry Amid Triple Highs of Inflation, Interest Rates, and Exchange Rates
Non-Bank Sectors Hit Harder... Household Debt, Marginal Firms, Real Estate PF Issues Highlighted
"Big Blur Era Accelerates Structural Reform... Urgent Need for Response"

Source=Getty Images Bank

[Asia Economy Reporter Minwoo Lee] It is forecasted that the financial industry will enter a stagnation phase next year due to the impacts of high inflation, high interest rates, and the weak Korean won. As concerns grow over the deterioration of soundness in areas such as household debt, marginal enterprises, and real estate project financing (PF), it is analyzed that financial companies need to strengthen risk management and focus on building the foundation for future growth.

Hana Bank’s Hana Financial Management Research Institute published the "2023 Financial Industry Outlook" report on the 26th, containing these insights. The report predicted that from next year, both growth and profitability in the financial industry will decline. It especially forecasted that non-bank sectors will be hit harder than banking.

‘Three Highs’ of Inflation, Interest Rates, and Exchange Rates Plus Low Growth... Financial Industry Stagnates

Source=Hana Financial Management Research Institute

The Hana Financial Management Research Institute expects the stagnation in the financial sector that began this year to continue into next year. For banking, the loan growth rate is projected to continuously slow down from 8.2% in 2021 to 5.3% this year and 4.3% next year. In particular, household loans are expected to remain at this year’s level. This is because mortgage loans will significantly slow due to the real estate market downturn, and credit loans will also decrease due to reduced investment demand. Corporate loans are expected to slightly increase due to rising demand for facility funds despite a slowdown in small business loans. Meanwhile, net interest margin (NIM) is expected to steadily improve with rising market interest rates, but profitability will decline as loan loss costs increase.

The securities industry is also expected to face a bleak outlook. With the stock market downturn continuing next year, brokerage commissions are expected to remain sluggish, and recovery in investment banking (IB) will be limited due to the real estate market slump. The report emphasized the need for soundness management of real estate PF, where debt guarantees have surged. Accordingly, securities firms are expected to strengthen asset management businesses to generate stable fees.

Source=Hana Financial Management Research Institute

The insurance industry is expected to experience low growth as insurance demand contracts amid economic slowdown. Specifically, life insurance investment income is expected to stagnate due to difficulties in securing bond trading profits during the rising interest rate period, and non-life insurance profitability is likely to deteriorate somewhat due to increased loss ratios caused by greater social mobility.

Specialized credit finance companies are expected to see growth stagnation due to economic slowdown and a significant decline in profitability due to rising funding costs. Card payments, leasing, and installment growth are expected to stagnate amid the recession, and profitability improvement will be difficult as funding costs for asset-backed securities increase. Concerns were also raised about liquidity risks stemming from the deteriorating supply-demand balance in the asset-backed securities market and the soundness of capital companies, whose real estate PF scale has recently expanded.

Researcher Changwon Ryu of Hana Financial Management Research Institute emphasized, "The financial industry in 2023 will experience growth stagnation due to economic slowdown and profitability decline due to increased funding and loan loss costs," adding, "It is necessary to strengthen internal management rather than pursue reckless growth."

Household Debt, Marginal Enterprises, Real Estate PF Surface... Need for Proactive Risk Management

Source=Hana Financial Management Research Institute

The Hana Financial Management Research Institute noted that vulnerabilities accumulated during the low interest rate era in household debt, marginal enterprises, and real estate PF are likely to surface as we enter the high interest rate era. Therefore, more proactive risk management is necessary.

In particular, the non-bank sector faces concerns over insolvency among vulnerable groups, self-employed multiple debtors, and local construction sites. Researcher Jongho Baek of Hana Financial Management Research Institute stated, "Although soundness stabilized downward over the past decade, 2023 is likely to see deterioration in soundness, with a sharp increase in household debt burden due to rising interest rates and increased PF defaults due to the real estate market downturn. On the other hand, the financial support during COVID-19 may have further deepened the illusion of soundness, so proactive responses from financial companies are required."

‘Big Blur Era’... Accelerated Structural Reform in Financial Industry

Source=Hana Financial Management Research Institute

Meanwhile, next year, structural reform in the financial industry is expected to accelerate due to government financial regulatory innovation policies. With platform intermediation allowed for deposits and insurance following loans and cards, competition between 'big tech' companies and financial firms is expected to intensify. At the same time, the separation of product manufacturing and sales within the financial industry is also expected to accelerate. Additionally, financial companies are expected to build integrated applications encompassing financial and non-financial services and accelerate new businesses such as digital assets and healthcare, following regulatory easing.

Researcher Ryu emphasized, "In 2023, financial companies must focus on crisis response as well as building sustainable business models," adding, "Amid environmental changes such as separation of manufacturing and sales and expansion of business scope, they must advance financial platforms and strive to secure new growth engines such as digital assets."

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