Banks Ahead of Q3 Earnings Announcement... Strong Performance Expected Due to Interest Rate Momentum

[Asia Economy Reporter Park Sun-mi] The banking sector is expected to report strong third-quarter earnings momentum driven by rising interest rates.

According to the financial sector on the 11th, the third-quarter earnings announcements for banks are scheduled one after another, starting with KB Financial on the 21st, followed by Hana Financial on the 22nd, Woori Financial on the 25th, and Shinhan Financial and Industrial Bank of Korea on the 26th. Although there is tightening of loans due to strengthened total household loan management, the average loan balance has already increased significantly, and combined with margin expansion from rising market interest rates, strong third-quarter earnings are anticipated.

According to consensus estimates compiled by financial information provider FnGuide for the net income attributable to controlling shareholders of the four major financial holding companies, the figures are ▲KB Financial 1.2038 trillion KRW ▲Shinhan Financial 1.1363 trillion KRW ▲Hana Financial 852.5 billion KRW ▲Woori Financial 672.5 billion KRW, respectively. The total net income of the four major financial holding companies in the first quarter of this year was about 3.8651 trillion KRW, estimated to increase by 8.8% compared to 3.5499 trillion KRW in the same period last year.

Despite the reduction of credit loan and overdraft limits to within annual income and 50 million KRW respectively, and the suspension and limit reduction of new real estate mortgage loans, household loans continue to increase. The household loan balance of the four major banks is expected to reach about 567.35 trillion KRW by the end of the third quarter, nearly 12 trillion KRW higher than 555.4823 trillion KRW at the end of the second quarter. Rather, the rise in loan interest rates to manage household debt is inevitable, creating an environment where net interest income in the banking sector can only continue to grow.

From mid-September, the effect of rising loan interest rates due to the base rate hike is taking place, and the liquidity coverage ratio (LCR) relaxation (from 100% to 85%) has been extended again, increasing the likelihood of further improvement in net interest margin (NIM). Additionally, loan maturity extensions and principal and interest repayment deferral programs for small and medium-sized enterprises and small business owners are ongoing, but the possibility of large-scale losses is low due to the COVID-19 related provisions accumulated last year.

Jeon Bae-seung, a researcher at Ebest Investment & Securities, said, "Household loan issuance in the banking sector will normalize after early next year, but since the household debt growth target for next year is set at 4%, the restraint policy is inevitable. However, the rise in loan interest rates and spread rates is favorable for securing interest income in the banking sector."

The launch of internet-only banks such as Toss Bank is not a threat to the performance of commercial banks. The mid-interest loan customers that Toss Bank aims to secure are not the main targets of existing commercial banks, and there is no reason for competition in high-credit loans amid the current atmosphere of strengthened household debt management.

Choi Jung-wook, a researcher at Hana Financial Investment, predicted strong third-quarter earnings for the banking sector, citing a situation where the interest rate momentum can continue. Baek Doo-san, a researcher at Korea Investment & Securities, also said, "The third-quarter earnings should focus on the base rate hike rather than household debt management," adding, "Considering the base rate hikes that will not be one-time, and the mismatch between borrowing demand and total loan management, the upward trend in NIM is expected to continue at least until next year."