Low Interest Rates and Bull Market... Commercial Banks' Financial Assets Soar 'Up'

4 Major Banks' 'Fair Value Measurement' Financial Assets Total 65.802 Trillion KRW
Impact of Continued Global Ultra-Low Interest Rates and Soaring Stock Prices
Analysis Questions Whether Asset Uptrend Will Continue This Year

[Asia Economy Reporter Song Seung-seop] Last year, the scale of financial assets held by domestic commercial banks in South Korea expanded significantly. As domestic interest rates fell due to COVID-19, bond prices surged, and the bullish stock market further increased the valuation of companies in which they held equity.

According to the business reports of the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori) on the 21st, the "financial assets measured at fair value through profit or loss" amounted to 65.802 trillion KRW. This is an increase of 15.8386 trillion KRW (31.70%) from 49.9634 trillion KRW last year.

Financial assets measured at fair value through profit or loss are priced at a value traded between rational and independent parties. These assets, such as stocks and bonds, are evaluated based on market prices. Assets acquired for short-term trading or repurchase to gain profits are classified as "profit or loss for the current period," while financial assets such as subscription rights not intended for short-term trading are classified as "other comprehensive income."

Looking at individual banks, all recorded an upward trend in related assets. Shinhan Bank had the largest amount of securities measured at profit or loss, totaling 21.8192 trillion KRW among the four banks. This is an increase of 3.1021 trillion KRW compared to the previous year’s 18.7161 trillion KRW. KB Kookmin Bank and Hana Bank held financial assets of 16.0423 trillion KRW and 15.5379 trillion KRW, respectively, marking increases of 15.69% (2.176 trillion KRW) and 45.10% (4.8296 trillion KRW) from the previous year.

Woori Bank, although having the smallest scale, showed a steep increase. Financial assets, which were 6.6725 trillion KRW in 2019, rose by 85.87% to 12.4024 trillion KRW in one year. This was influenced by derivative assets increasing by 136.49% to 6.9085 trillion KRW and securities expanding by 46.33% to 5.4354 trillion KRW.

Financial assets recorded as other comprehensive income also saw a slight increase. Last year, the fair value measured financial assets of the four major banks totaled 144.9139 trillion KRW, an increase of 2.6318 trillion KRW from the previous year. Compared to 2018’s 114.3682 trillion KRW, this represents a growth of 30.5457 trillion KRW (26.70%).

Financial Asset Valuation Gains Also Up... Will It Continue This Year?

This is interpreted as a result of rising bond prices and stock prices. It is analyzed that banks significantly increased holdings of financial assets whose value rises through trading.

Last year, the world maintained an ultra-low interest rate policy to overcome the shock of COVID-19. South Korea also lowered its interest rate to a historic low of 0.50% in May and has maintained it since. Generally, bond prices steadily rise when interest rates fall.

The stock market formed a bullish trend, contrary to the real economy’s recession. On the 20th, it recorded a closing price of 3,220.70 points, marking an all-time high.

Accordingly, banks appear to have increased valuation gains by realizing profits through buying and selling equities and bonds. For example, Woori Bank’s bond trading gains increased more than twofold from 10.886 billion KRW in 2019 to 23.695 billion KRW. Hana Bank’s financial asset gains recorded in other comprehensive income jumped from 48.3 billion KRW to 281.1 billion KRW.

However, there are concerns about whether the value of financial assets can continue to rise steadily this year as it did last year. Professor Kim Dae-jong of the Department of Business Administration at Sejong University analyzed, "In the long term, bond interest rates tend to decline steadily," but added, "Due to rising U.S. bond interest rates, bond prices may temporarily fall."