[Financial Microscope] Regional Financial Groups Boost Earnings and Shareholder Returns, but Q2 Challenge Is Safeguarding Bank Asset Quality

The three major regional financial holding companies-BNK, JB, and iM Financial-recorded a combined net profit of approximately 500 billion won in the first quarter, up about 10% year-on-year, thereby expanding shareholder returns. However, their main subsidiaries, the banks, saw a sharp rise in non-performing loan (NPL, loans overdue by more than three months) ratios, leading to worsening asset quality indicators that have emerged as a pressing issue to address. While these regional financial holding companies plan to focus on risk mitigation in the second quarter through active disposal and sale of distressed assets, there are concerns that prolonged geopolitical risks from the Middle East and continued sluggish regional economies may entrench asset quality problems.

According to the financial sector on May 6, the combined net profit of the three regional financial groups-BNK, JB, and iM Financial-for the first quarter of this year totaled 532 billion won. This represents an increase of about 10% from the same period last year. By holding company: BNK Financial posted 211.4 billion won, JB Financial 166.1 billion won, and iM Financial 154.5 billion won. The strong performance was mainly driven by increased fee income from non-bank affiliates such as securities and capital businesses. While JB Financial and iM Financial saw slight growth compared to the previous year, BNK Financial stood out with a 27% surge over the first quarter of last year.

On the back of this improved performance, the companies also pledged large-scale shareholder returns. BNK Financial resolved to implement a 60 billion won share buyback and cancellation and a quarterly cash dividend of 150 won per share for the first half of this year, up 50% and 25%, respectively, from the same period last year. JB Financial also decided on a quarterly dividend of 311 won per share, more than double the previous year’s level, while iM Financial announced plans to introduce tax-exempt dividends starting with this year’s year-end dividend, as part of efforts to appease shareholders.

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Despite the defensive performance by regional financial groups, profitability and asset quality at their core subsidiaries-the banks-have clearly worsened. This is mainly attributed to increased “money move” to the stock market this year and the impact of high interest rates, high inflation, and high exchange rate risks stemming from the Middle East in March, which have deteriorated the economic conditions for local borrowers. Each of these factors has independently contributed to the decline.

Jeonbuk Bank and Gwangju Bank, both subsidiaries of JB Financial, posted first-quarter net profits of 39.9 billion won and 61.1 billion won, down 22.5% and 8.7% year-on-year, respectively. iM Bank also saw its net profit fall by 3.6% to 120.6 billion won from 125.1 billion won in the same period last year. For BNK Financial, Busan Bank’s net profit increased 26.3% to 175.6 billion won, but Kyongnam Bank’s net profit dropped by 1.9 billion won to 67.4 billion won, resulting in mixed fortunes.

More troubling than declining profitability is asset quality. The average delinquency rate at regional banks for the first quarter was 1.188%, triple the 0.402% average of the five major commercial banks. Busan Bank and Kyongnam Bank saw their delinquency rates rise from 0.73% and 0.68%, respectively, in the first quarter of last year to 1.21% and 1.05% this year-an increase of 48 basis points (bp) and 37bp, respectively (1bp=0.01 percentage points). Jeonbuk Bank (1.65%) and Gwangju Bank (1.17%) also experienced sharp increases, while iM Bank was the only one to successfully lower its delinquency rate.

The NPL ratio, which represents the proportion of non-performing loans, also rose year-on-year at all banks except iM Bank. Notably, Jeonbuk Bank (1.22%), Busan Bank (1.21%), and Gwangju Bank (1.00%) have all entered the 1% range. Kyongnam Bank’s NPL ratio also increased by 12bp year-on-year, reaching 0.94%.

As non-performing loans increased, the NPL coverage ratio-a measure of a bank’s capacity to absorb losses-has reached a dangerous level. All regional banks except iM Bank (107.1%) have fallen below the regulatory recommended level of 100%. An NPL coverage ratio below 100% means that if all non-performing loans were to be classified as losses, current loan-loss allowances would be insufficient to fully cover them. In particular, Busan Bank and Kyongnam Bank saw their NPL coverage ratios plummet to the 80% range in just one quarter (87.36% and 87.08%, respectively), raising alarms about their ability to manage asset quality.

In response, regional banks plan to restore asset quality in the second quarter through aggressive non-performing asset sales, enhanced loan screening, and tighter management. There is concern that, given the likelihood of prolonged regional economic stagnation, failure to actively manage these issues could lead to a vicious cycle of deteriorating bank health.

BNK Financial, where the NPL coverage ratio has dropped sharply, aims to raise it above 100% by the end of the year. Sungwook Park, Chief Financial Officer (CFO) of BNK Financial, said in a conference call on April 30, "For corporate loans, we will focus on supporting local companies and large corporations, particularly those with strong credit, while for household loans, we will continue expanding unsecured loans to professionals through non-face-to-face channels."

JB Financial plans to strengthen screening and management for cyclical industries by controlling exposure limits to high-risk sectors and restricting final approval authority. Instead of branches approving corporate loans of a certain size as usual, the head office will now conduct final reviews based on industry conditions and company performance, enabling stricter oversight. A JB Financial representative stated, "While the NPL ratio may temporarily rise, we will strengthen our loss absorption capacity by increasing the coverage ratio."

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