[Financial Paradigm Shift]② Changed Leading Bank Throne in ELS Reserves... Banks Need to Increase Non-Interest Income

Shinhan Bank's Net Profit Last Year: 3.6954 Trillion KRW
About 400 Billion KRW More Than Kookmin Bank
ELS Provisions Made the Difference
Kookmin Bank Set Aside 800 Billion KRW in Provisions Alone
Korea Institute of Finance: "Need to Expand Non-Interest Income"
Non-Interest Income Ratio at Domestic Banks Stands at 12%
In U.S. Banks, the Ratio Exceeds 30%

Editor's NoteAs 1% low growth becomes entrenched, the survival competition among domestic financial companies, which have grown mainly in the domestic market, is intensifying. To survive the severe domestic slump, innovation is being triggered across the entire financial sector including banks, insurance, and cards, with fierce ranking competition emerging in the process. Asia Economy is focusing on companies causing tectonic shifts through innovation in major financial sectors and running a series to consider what strategies financial companies should establish in the era of low growth.

Shinhan Bank has reclaimed its position as the leading bank after six years. KB Kookmin Bank lost the throne after setting aside a provision of 800 billion KRW for losses related to Hong Kong H-Share Index (HSCEI) equity-linked securities (ELS). With a change in leadership this year and the clearing of negative factors, KB Kookmin Bank is expected to engage in a fierce showdown with Shinhan Bank.

ELS Provisions Decided Performance... Kookmin Bank Set Aside 800 Billion KRW in Provisions

Shinhan Bank recorded the highest net profit in 2024 at 3.6954 trillion KRW, a 20.5% increase from the previous year. Shinhan Bank explained, "Net profit increased due to growth in interest income from loan assets, expansion of non-interest income from increased fee income, and a decrease in bad debt expenses following the expiration of additional provisions set aside last year."

KB Kookmin Bank's net profit decreased by 0.3% to 3.2518 trillion KRW, dropping to third place behind Hana Bank (3.3564 trillion KRW). A KB Kookmin Bank official said, "The impact of provisions for losses related to Hong Kong H-Share Index ELS was significant."

One of the biggest factors affecting performance was the provision for ELS loss compensation. Last year, the sharp plunge in the Hong Kong H-Share Index caused many related ELS products to incur principal losses, sparking controversy. Ultimately, financial authorities recognized the Hong Kong H-Share Index ELS as mis-sold. Consequently, banks set aside provisions for loss compensation last year.

Shinhan Bank set aside 274 billion KRW in provisions related to ELS but reversed 91.3 billion KRW, resulting in an actual provision of 182.7 billion KRW. In contrast, KB Kookmin Bank, which sold overwhelmingly more ELS, set aside 862 billion KRW in provisions. Considering the net profit difference of 443.6 billion KRW between Shinhan Bank and KB Kookmin Bank last year, the Hong Kong H-Share Index ELS provisions had a significant impact.

Shinhan Bank's Non-Interest Income Surged 20.6%

Looking at the performance in detail, both banks saw steady growth in interest income, but differences appeared in non-interest income. Last year, Shinhan Bank's interest income was 8.837 trillion KRW, up 5.2% from 8.4027 trillion KRW the previous year. KB Kookmin Bank's interest income increased by 3.6% to 10.2239 trillion KRW from 9.8701 trillion KRW the previous year.

?

Regarding non-interest income, Shinhan Bank recorded 520.6 billion KRW, a 20.6% increase from 431.7 billion KRW the previous year. This was due to increased fee income from bancassurance and investment banking fees, which raised total fee income to 1.023 trillion KRW, up 12.3% from 911 billion KRW the previous year. In contrast, KB Kookmin Bank's non-interest income was 1.1129 trillion KRW, down 4.7% from 1.1683 trillion KRW the previous year. Key fee incomes such as trust and banking services decreased by 5.6% and 24.1% respectively compared to the same period last year.

The net interest margin (NIM), which gauges bank profitability, was similar. Last year, Shinhan Bank's NIM was 1.58%, down 0.04 percentage points from 1.62% the previous year. KB Kookmin Bank's NIM also fell by 0.05 percentage points to 1.78% from 1.83% the previous year.

Expanding Interest Income Is Not Easy... Need to Increase Non-Interest Income Ratio

On the 19th of last month, commercial bank presidents in Seoul's Jung-gu district at the Bankers' Hall finished a commemorative photo session with Lee Bok-hyun, Governor of the Financial Supervisory Service, before starting their meeting and are moving to their seats. 2025.2.19 Photo by Jo Yong-jun

Although interest income has shown steady growth, there are ongoing calls to establish a balanced revenue structure to enhance the international competitiveness of domestic banks. Securing such a balanced revenue structure is expected to determine future competition for the leading bank position.

According to data released by financial authorities in 2023, the proportion of non-interest income in domestic banks over the past five years has been around 12.0%. This means 88% of total income is generated through interest-related business. However, the proportion of non-interest income in U.S. banks reaches 30.1%, indicating relatively lower risk even when benchmark interest rates begin to decline.

Breaking down domestic banks' non-interest income by category, fee income accounted for the largest share at 5 trillion KRW (8.4%) as of 2022. This was followed by foreign exchange and derivatives-related income, trust-related income, and securities-related income in order. Foreign exchange and derivatives-related income accounted for 2.8 trillion KRW (4.7%), while securities-related income was only about 40 billion KRW.

Looking at last year's domestic bank performance, interest income slightly increased in the first half due to loan growth, but net interest margin declined due to a narrowing loan-deposit interest rate spread. The outlook for this year is expected to be even more challenging. Factors such as a slowdown in the real economy, potential benchmark interest rate cuts, household loan restraint policies, intensified corporate loan competition, the emergence of new internet-only banks, and strengthened capital regulations make it difficult for banks to expand interest income.

Woojin Kim, a research fellow at the Korea Institute of Finance, analyzed, "Currently, domestic banks' revenue structure is concentrated on interest income. If low interest rates and low growth persist, it may be difficult to continuously generate profits due to shrinking net interest margin (NIM) and loan asset size. Expanding fee-related income, which is less sensitive to changes in the financial environment and imposes less additional capital burden when expanding business, is effective."

Youngdo Kim, a senior research fellow at the Korea Institute of Finance, also emphasized, "Since the era of achieving results through stable household loan expansion has passed, domestic banks need to restore their fundamental function of supplying funds to productive sectors and establish a sustainable growth foundation."

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