1Q Net Profit of 4 Major Banks Expected to Match Record High Last Year... Slowdown Anticipated in Second Half

Interest Business Criticism Amid Growing 'Interest' in Q1 Earnings

The financial sector's attention is focused on the first-quarter earnings of the four major domestic financial holding companies, which will be released soon. This comes amid criticism of "interest profiteering," with each company announcing various interest rate cuts and social contribution projects. While the industry, especially securities firms, is optimistic about strong earnings, there is growing concern that deteriorating business conditions in the second half of the year could lead to poor performance.

According to the financial sector on the 5th, the four major domestic financial holding companies (KB, Shinhan, Hana, Woori) are expected to report controlling shareholder net income for the first quarter similar to last year's level (approximately KRW 4.5948 trillion).

Considering that the combined net profit of the four major financial groups in the first quarter of last year was at an all-time high, this year's net profit is also set to reach a record high. The consensus earnings forecast from securities firms is similar. The consensus for the four major financial groups' first-quarter (January to March) earnings is KRW 4.6297 trillion.

Under normal circumstances, this level would raise expectations for a strong earnings season, but the banking sector, which posted massive net profits, is not so straightforward. This is because political circles and authorities have criticized the enormous profits earned from the unprecedented rapid interest rate hikes last year as "interest profiteering."

Despite the poor performance of non-bank affiliates due to the sharp rise in interest rates, the financial holding companies have maintained high earnings levels thanks to the strong performance of their core banking divisions. According to the Bank of Korea, as of the end of February, the average loan interest rate at commercial banks (including household and corporate loans) was 5.32%. This is slightly lower than the peak last year (November, 5.64%) but still 181 basis points (1bp = 0.01%) higher than February last year (3.51%).

However, the dominant view in the financial sector is that the earnings of the four major financial groups will slow down going forward. This is because expectations are growing that the U.S. Federal Reserve (Fed) will moderate the pace of interest rate hikes, leading to a decline in market interest rates. In fact, loan interest rates are also trending downward. For example, as of the previous day, the variable interest rate for new COFIX (COFIX) 6-month mortgage loans at commercial banks fell to between 4.18% and 5.58%. Some internet-only banks are even offering loan rates in the low 3% range.

Although the delinquency rate is not at a concerning level, it is on a continuous upward trend. The new delinquency rate at commercial banks rose from 0.04% in January last year to 0.05% in August, then to 0.07% in December, and has continued to increase this year, reaching 0.08% in January and 0.09% in February.

Pressure from political circles and authorities is also expected to have an impact. At a press briefing on major supervisory inspection issues in the banking sector held yesterday, the Financial Supervisory Service (FSS) predicted that about 1.7 million borrowers would benefit from approximately KRW 330 billion in loan interest reductions annually due to a series of win-win financial support measures recently implemented by commercial banks. Considering that banks have lowered and adjusted interest rates for this purpose, this directly affects their profits.

Authorities have been emphasizing the need to set aside provisions in consideration of future market uncertainties. Recently, through a task force (TF) on banking management, business practices, and system improvements, the authorities have been promoting measures such as introducing a special loan loss reserve requirement to enhance banks' loss absorption capacity, imposing countercyclical capital buffers (CCyB), and implementing stress buffer capital systems.

A financial sector official said, "Since the Silicon Valley Bank incident has strengthened the view that interest rates have peaked, market interest rates are being pulled down, so loan interest rates are likely to decline as well." He added, "Given the increasing demands from authorities for provisions, interest rate cuts, and win-win finance such as social contributions, earnings are expected to follow a downward trend in the second half of the year."

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