Banking Sector Growth Slows Next Year... Net Profit Down 9% Due to Increased Loan Loss Provisions

Next year, the growth rate of the domestic banking sector is expected to continue slowing down, and net income is projected to decrease by about 9% due to an increase in credit loss expenses.

On the 7th, Kwon Hong-jin and Kim Seok-ki, research fellows at the Korea Institute of Finance, announced this during their presentation titled "Trends and Outlook of the Banking Industry and Financial Innovation" at the 2023 Financial Trends and 2024 Outlook seminar held at the Bankers' Hall in Jung-gu, Seoul.

Korea Minting and Security Corporation stacked about 100 bills of 50,000 won notes that showed warping to test the normal operation of ATMs.

According to the presentation, next year’s net income of the banking sector is expected to remain at 19.6 trillion won, down approximately 9.3% from this year’s estimated 21.6 trillion won. Despite a decline in market interest rates, the high interest rate trend persists, leading to a decrease in both loan demand and supply, and a potential contraction in net interest margin (NIM).

While interest income is expected to stagnate, credit loss expenses are predicted to expand. Recently, the proportion of newly delinquent loans has been rising, signaling a potential increase in credit loss expenses. Additionally, factors such as the increased risk of non-performing loans from the surge in lending during the COVID-19 pandemic, the end of maturity extensions and interest deferral applications, and the possibility of upward adjustments in loss given default (LGD) in case of defaults have been identified as contributors to rising credit loss expenses.

Accordingly, the two research fellows suggested that next year’s management strategies for domestic banks should focus on strengthening digital competitiveness, establishing a foundation for sustainable growth, and enhancing risk management. To strengthen banks’ digital competitiveness, they emphasized the need to activate collaboration and investment with fintech companies and develop customized financial services suitable for digital channels.

Furthermore, to build a foundation for sustainable growth in preparation for deteriorating profitability, they proposed concentrated investment in high-growth corporate finance sectors, strengthening digital competitiveness related to corporate finance, enhancing climate risk response, and pursuing new overseas expansion strategies such as joint acquisition of shares in local foreign financial institutions.

The two research fellows stated, "To strengthen risk management next year, it is necessary to implement strict credit evaluations for timely recognition of losses in terms of asset soundness, and to enforce credit management policies that incentivize borrowers to maintain soundness themselves." They added, "Regarding funding risk, it is important to consider strengthening core deposit competitiveness and diversifying funding timing."

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