Financial Holding Company Records All-Time High Performance... COVID-19 and Political Cheong Invoices Remain Variables (Comprehensive)

Net Profit Exceeds 9 Trillion Won in First Half
Financial Holding Companies Gradually Decide on Interim Dividends
Growth Trend Expected to Continue in Second Half

[Asia Economy Reporters Kwangho Lee and Kiho Sung] Domestic financial holding companies, which recorded record-breaking earnings in the first half of this year, are also expected to continue their earnings spree in the second half. This outlook is based on the Bank of Korea’s announcement of a possible interest rate hike within the year, which would raise loan interest rates and increase interest income. However, the persistent spread of COVID-19 despite elevated social distancing measures remains a variable. Additionally, concerns are growing that with the presidential election scheduled for the first half of next year, the political sphere may use the 'record-high earnings' as a pretext to present various financial demands.

First Half Net Profit Exceeds 9 Trillion Won... Earnings Spree Expected to Continue in Second Half

According to the financial sector on the 27th, the combined net income of the five major financial holding companies?KB, Shinhan, Hana, Woori, and NH Nonghyup?reached 9.3729 trillion won in the first half, nearly a 50% increase compared to the same period last year. All five financial holding companies posted record-high earnings.

The significant increase in net profits of financial holding companies is mainly due to a surge in interest income centered on banks. Additionally, the activation of the stock market has strengthened the profitability of affiliated securities firms, and other fee income has also increased. In particular, the surge in loan demand driven by prolonged low interest rates, leading to 'debt-financed investment' (dijitu) and 'all-in borrowing' (yeongkkeul), has significantly increased interest income, while the stock investment boom has boosted securities firms’ fee income.

The combined interest income of the five banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 20.4494 trillion won in the first half, surpassing 20 trillion won for the first time ever. This was the result of a continuous rise in market interest rates and a sharp increase in low-cost demand deposits, which improved the interest margin.

The net interest margin (NIM) of KB Kookmin, Shinhan, Hana, and Woori banks ranged from 1.37% to 1.56%, rising by 0.03 to 0.04 percentage points compared to the same period last year. Only NH Nonghyup Bank saw a 0.06 percentage point decline to 1.61% compared to the previous year.

This upward trend is expected to continue into the second half. The Bank of Korea is likely to raise the base interest rate as early as August or by October at the latest. Woori Bank estimated that a 0.25 percentage point hike in the base rate would increase its interest income by about 175 billion won. The profits of larger asset holders like KB Financial, Shinhan Financial, and Hana Financial are expected to be even greater.

The increase in securities firms’ fee income due to the stock investment boom and the rise in card company fee income from recovering private consumption also drove strong earnings. Shinhan Financial’s net fee income in the first half surged 24.3% year-on-year to 1.404 trillion won. Of this, securities business fee income rose 40.6% to 261.7 billion won, and credit card fee income increased 4.8% to 181.5 billion won. KB Financial’s net fee income rose 32.7% (1.8326 trillion won), Hana Financial 16.7% (1.2613 trillion won), Woori Financial 46.4% (729 billion won), and Nonghyup Financial 28.5% (983.7 billion won) compared to the previous year.

With record-breaking earnings, all five major financial holding companies are expected to pay quarterly and interim dividends for the first time ever. Shinhan Financial plans to pay shareholders an equal amount quarterly, considering last year’s per-share dividend as of the end of June. This will be decided at the board meeting scheduled for next month. KB Financial has resolved an interim dividend of 750 won per share, Hana Financial 700 won, and Woori Financial 150 won. Nonghyup Financial is also positively reviewing the matter.

Variable is the Spread of COVID-19... Concerns Over ‘Political Demands’

The key variable is how quickly the spread of COVID-19 can be controlled. The fourth wave continues, with an average of about 1,500 new cases per day over the past week. Financial holding companies claim they have secured sufficient loss absorption capacity, but if the fourth wave prolongs, they may have to set aside large provisions again. Moreover, if COVID-related loans are extended again due to the fourth wave, it means that latent bad debts are being deferred, making future responses difficult. Last year, financial holding companies increased their loan loss provisions by 52.6% compared to the previous year to strengthen their loss absorption capacity.

A financial sector official said, "If the current trend continues, record-breaking earnings are expected in the second half as well, but the key is how much shock from the fourth wave of COVID-19 can be absorbed," adding, "Ultimately, the development of the COVID-19 situation will be the variable."

Along with next year’s presidential election, various ‘populist demands’ from the political sphere are also factors tightening the financial holding companies’ situation. The most controversial bill and pledge in the financial sector recently is Gyeonggi Province Governor Lee Jae-myung’s ‘Basic Series.’ The ‘Basic Loan’ is a pledge to provide up to 10 million won in low-interest loans at 3% annually to young people aged 19 to 34, and related amendments to the Microfinance Act and Regional Credit Guarantee Foundation Act have already been submitted to the National Assembly.

There are currently five bills proposing to lower the maximum interest rate to 10-15%, and the ‘Bank Debt Forgiveness Act,’ which reduces bank loan payments during disaster situations, is also under review by the Standing Committee on Political Affairs.

Experts express concern that political demands are exceeding the banks’ public interest roles and regulatory boundaries. Professor Ji Yong Seo of Sangmyung University’s Department of Business Administration pointed out, "The government and political circles tend to think of banks’ money as petty cash, but the banks’ money belongs to shareholders and depositors," adding, "We should not consider banks making money as something evil."