Bank Earnings Growth Trend Continues Next Year

[Asia Economy Reporter Song Hwajeong] As banks continue to achieve record-breaking performance, their earnings growth is expected to continue next year as well.

According to NH Investment & Securities on the 4th, the combined controlling net profit of KB Financial Group, Shinhan Financial Group, Woori Financial Group, Hana Financial Group, and Industrial Bank of Korea is expected to increase by 2.8% compared to this year, reaching 19.4175 trillion KRW next year.

The growth factors for earnings include increased interest income due to the rise in net interest margin (NIM) and some improvement in non-interest income.

With continued interest rate hikes, the increase in net interest income driven by NIM growth is expected to lead earnings improvement next year as it did this year. The average NIM of the five banks in 2023 is expected to rise by 12 basis points (bp) (1bp=0.01%) to 2 percentage points (p) compared to this year. Accordingly, the combined net interest income is projected to increase from 47 trillion KRW this year to 52.5 trillion KRW next year, surpassing 50 trillion KRW.

Researcher Jeong Junseop of NH Investment & Securities explained, "The basis for the NIM improvement forecast is the base rate hikes and market rate increases from the fourth quarter of this year through the first half of next year, as well as the effect of the 2023 average value rising due to the sharp NIM increase this year." He added, "During the base rate hike period, bank bonds and negotiable certificates of deposit (CD) rates are expected to remain strong, and the COFIX (Cost of Funds Index), currently at a new base of 3.4%, is likely to reach the level of the 3-year government bond (currently 4.095%) within a few months, so the rise in bank loan base rates will continue to drive an upward trend in bank loan interest rates."

However, the pace of NIM growth is expected to gradually slow due to increased funding costs. The proportion of core deposits (low-cost deposits) is steadily decreasing, leading to higher funding costs. As the economic recession becomes a reality, funds that have lost investment destinations are rapidly flowing into bank time deposits and savings, causing the share of low-cost deposits to decline quickly. The proportion of core deposits in commercial banks is expected to fall from about 50% in 2021 to the low 40% range by the end of this year, and further down to the 30% range next year.

The slowdown in loan growth is also a cause of the decline in NIM improvement. The growth rate of won-denominated loans for the five financial groups and banks next year is forecasted at 2.7%, a negative growth of 1.8 percentage points compared to 4.5% this year. Due to the sharp rise in loan interest rates, household loan contraction is inevitable. The household loan growth rate next year is expected to continue negative growth at -1.8%, following this year. Mortgage loans are estimated to shrink by -0.3%, and credit loans by -3.3%. Researcher Jeong analyzed, "In the case of mortgage loans, the interest burden from the steep rise in loan interest rates inevitably lowers the upper limit of house prices that households can afford," adding, "Credit loans are expected to perform worse than mortgage loans because not only real estate but also other investment assets such as stocks and cryptocurrencies lack investment appeal, and households with financial capacity will continue to reduce credit loans by repaying existing loans."

[Image source=Yonhap News]

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