Last Year's Financial Holding Companies' Performance, a 'Bittersweet' Hyperbola... KB Smiles While Woori Cries

This Year’s Variables: ELS, Provisions, and Base Interest Rate

The earnings of major financial holding companies, which will be sequentially disclosed starting this week, are expected to show a bipolar curve of joy and sorrow. KB Financial Group is expected to maintain its position as the 'leading bank' based on solid growth, while other financial holding companies such as Shinhan, Hana, and Woori are anticipated to remain flat or experience negative growth.

However, the industry views this year as a challenging one for financial holding companies. There are significant adverse factors such as increased provisions for non-performing loans including real estate project financing (PF), compensation related to equity-linked securities (ELS), and the expansion of win-win finance.

According to FnGuide, a financial information analysis firm, the consensus net income attributable to controlling shareholders for KB Financial Group this year is estimated at 4.8698 trillion KRW. This represents a 10.81% increase compared to the previous year (4.3948 trillion KRW). Although it falls short of the initial expectation of exceeding 5 trillion KRW in net income, it is predicted to be the only one among the four major financial holding companies (KB, Shinhan, Hana, Woori) to show double-digit growth. Despite adverse factors such as costs related to win-win finance and provisions recognized for Taeyoung Construction, KB’s well-established portfolio?evidenced by a non-bank segment net income ratio of about 37% as of the end of Q3?and strong fundamentals, including an industry-leading Common Equity Tier 1 (CET-1) ratio of 13.7%, are cited as the main reasons.

The performance outlook for other financial holding companies is less promising. Shinhan Financial is expected to show a slight decline of 3.20% to 4.4938 trillion KRW compared to the previous year (4.6423 trillion KRW). Hana Financial is predicted to remain flat with a slight increase of 0.15% to 3.5578 trillion KRW from the previous year (3.5524 trillion KRW). Particularly, Woori Financial, which does not have securities or insurance affiliates, is forecasted to show a clear decline of 11.98%, remaining at 2.7652 trillion KRW.

Overall, the flat or declining earnings of financial holding companies are attributed to burdens related to expanded win-win finance at the end of last year and loss recognition related to Taeyoung Construction. Earlier, the banking sector and financial authorities agreed to provide interest refunds (cashbacks) to small business owners and self-employed individuals. Although the proportion varies by bank, it is reported that 70-80% of the related costs were reflected in last year’s earnings. Hana Securities recently projected in a report that the banking sector recognized about 1.7 trillion KRW in costs in Q4 alone due to burdens related to win-win finance (1.4 trillion KRW) and provisions set for Taeyoung Construction’s workout application (310 billion KRW).

While one-off burdens such as win-win finance are expected to disappear, making this year’s financial sector earnings outlook relatively bright, the industry also sees several negative factors. First, large-scale losses have occurred since the beginning of the year in equity-linked securities (ELS) tracking the Hong Kong H Index, which many banks have handled, potentially causing compensation issues. Previously, banks compensated at rates of 40-80% following decisions by the Financial Dispute Mediation Committee during the overseas interest rate-linked derivative-linked fund (DLF) and Lime Asset Management incidents. Although the enactment of the Financial Consumer Protection Act has introduced safeguards against mis-selling, making the situation different from the DLF and Lime cases, the industry believes some level of burden is inevitable.

Authorities’ orders to strengthen provisions for non-performing or potentially non-performing loan claims, such as real estate PF, may also have an impact. Recently, Lee Bok-hyun, Governor of the Financial Supervisory Service, instructed financial companies at an executive meeting to strengthen loss recognition related to non-performing or potentially non-performing real estate PF loans.

A financial industry official said, "It is difficult to predict when, but if the U.S. Federal Reserve (Fed) lowers interest rates, the net interest margin (NIM) that has supported bank earnings so far may also decline. Also, if market interest rates fall, companies that have relied on loans may shift to issuing corporate bonds, so it is hard to make a definitive judgment."

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