Growing Concerns Over Regional Finance Performance... Commercial Banks Seek Survival Through Conversion and Diversification

JB Financial, H1 Net Profit Rises 1.9%
BNK and DGB Face Contraction Outlook

Regional financial holding companies such as BNK, JB, and DGB Financial Group are struggling with deteriorating profitability. This comes amid a surge in earnings for major financial holding companies that oversee commercial banks. Regional financial holding companies are comprehensively reviewing measures such as improving their structure through conversion to commercial banks and diversifying their businesses by expanding non-bank sectors.

According to the financial sector on the 27th, BNK Financial announced in its earnings report the previous day that its consolidated net income for the first half of this year, based on controlling shareholders, was 460.2 billion KRW. This represents a decrease of about 8.89% (44.9 billion KRW) compared to the same period last year (505.1 billion KRW).

JB Financial, which also announced its earnings on the same day, performed relatively well with a record-high net income of 326.1 billion KRW for the first half. However, while the second quarter net income (162.8 billion KRW) rose 6.2% year-on-year, the overall first half net income growth rate, including the first quarter results, was only 1.9%.

DGB Financial’s earnings announcement is still pending, but the outlook is not optimistic. According to financial information analysis firm FnGuide, DGB Financial’s net income for the first half of this year (based on controlling shareholders) is expected to decrease by 1.87% year-on-year to 120.9 billion KRW.

This trend sharply contrasts with KB Financial Group, which announced its earnings a day earlier. KB Financial reported a second quarter net income of 1.4991 trillion KRW and a first half net income of 2.9967 trillion KRW, increasing by 23.9% and 12.2%, respectively.

The relative underperformance of regional financial companies is largely attributed to asset quality issues, according to financial sector analysis. BNK and DGB Financial are facing increasing risks related to real estate project financing (PF). JB Financial is also evaluated to have lingering asset quality concerns related to the regional economy. In fact, looking at BNK Financial’s subsidiary earnings, BNK Investment & Securities and BNK Capital, which mainly handle real estate PF, saw their net incomes fall by 60.5% and 40.0%, respectively, to 18.8 billion KRW and 71.2 billion KRW.

Seol Yong-jin, a researcher at SK Securities, said, "The regional economy is better than expected, but asset quality risks such as PF are constraining earnings," adding, "Regulatory authorities are demanding increased provisions to secure asset quality, making cost increases inevitable for regional financial institutions as well."

The outlook is also not optimistic. The core net interest margin (NIM) is expected to gradually decline. Researcher Seol explained, "Regional financial companies have a relatively high proportion of interest income, and recently, in terms of loans, they have focused more on increasing household loans rather than corporate loans compared to commercial banks. They have also relied relatively heavily on market-based deposits such as bank bonds for funding. This has exerted downward pressure on NIM."

Regional financial companies are striving to find countermeasures to recover profitability. DGB Financial recently started efforts to convert Daegu Bank into a commercial bank. Daegu Bank formed a 'Commercial Bank Conversion Task Force Team (TFT)' co-chaired by Cheon Byung-gyu, Group Chief Strategy Officer (Executive Director) of the holding company, and Lee Eun-mi, Head of Management Planning at Daegu Bank (Managing Director). Daegu Bank plans to apply for regulatory approval as early as September. DGB Financial expects that if Daegu Bank converts to a commercial bank, its funding costs will decrease, enhancing its interest rate competitiveness.

JB Financial is focusing on business diversification. The previous day, it acquired a 15% stake in the fintech company 'Finda.' Compared to BNK and DGB Financial, which own securities and insurance companies, JB Financial is more dependent on Gwangju and Jeonbuk Banks. Kim Ki-hong, Chairman of JB Financial Group, recently identified "securing future growth engines through business diversification" as a key task at the group’s 10th anniversary ceremony.

A financial sector official said, "With population decline and economic recession in regional areas, along with the emergence of internet-only banks, the medium- to long-term profitability of regional financial institutions is increasingly likely to deteriorate," adding, "The conversion of regional banks to commercial banks and attempts at diversification are part of the response to this."

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