[2022 Financial Sector Outlook] Banks Brighten Up... Securities and Insurance Remain Gloomy

Banking Sector
Interest Margin Growth Amid Rate Hike Trend
KB Kookmin, Shinhan, Woori, Hana, etc.
Record High Profit March Expected Next Year

Brokerage Sector
Main Revenue Source Commission Fees Hit
Combined Net Profit of 7 Brokerages
5.1 Trillion KRW...25.1% Sharp Decline Expected

Insurance Sector
Poor Performance Due to COVID-19 Base Effect
IFRS17 Introduction in Second Half
Expected Benefit from Profit and Loss Smoothing

[Asia Economy Reporter Park Ji-hwan] Banks are expected to continue their soaring performance, but securities and insurance companies are unlikely to maintain the same momentum next year.

According to financial information firm FnGuide on the 30th, the net profit of four major banks?KB Kookmin, Shinhan, Woori, and Hana?is estimated to increase by 8.1% to 15.4696 trillion KRW next year compared to this year. Following this year, next year will also mark a record high profit streak. With the continued trend of base rate hikes next year, banks' loan interest rates are expected to rise, leading to an increase in net interest margin (NIM). It is anticipated that the net interest margin will rise by about 8 to 9 basis points (1bp = 0.01%) due to two base rate hikes next year. Kim Jae-woo, a researcher at Samsung Securities, stated, "If two base rate hikes are implemented next year, the annual profit of the banking sector is expected to grow by around 10%. Although bank stocks do not offer high expected returns, the trading band is expected to gradually trend upward."

Securities firms had their best year ever with record-breaking performance this year, but their outlook for next year is not bright. Mirae Asset, Samsung, Korea Investment, and NH Investment & Securities have already achieved cumulative operating profits of 1 trillion KRW by the third quarter. This was thanks to increased brokerage fees from the individual investor stock frenzy, higher asset management (WM) fee income, and solid performance in the investment banking (IB) sector.

However, next year, brokerage fees, which have been a major source of income, are expected to be hit by rising interest rates and a decline in stock market trading volume. The combined net profit of seven major securities firms is projected to drop sharply by 25.1% to 5.1859 trillion KRW from this year's estimate of 6.9206 trillion KRW. In fact, the average daily trading volume in the domestic stock market in December fell sharply to around 21 trillion KRW, about half of the 42 trillion KRW in January this year. Gu Kyung-hoe, a researcher at SK Securities, evaluated, "The future of the securities industry is bright in the long term as financial market funds continue to flow in, but due to the slowdown in trading volume, there is a lack of short-term upward momentum, so we maintain a neutral investment opinion."

The insurance sector showed a clear downward trend in stock prices despite favorable performance this year, and the outlook for next year is also not optimistic. Samsung Life Insurance recorded a 52-week high of 88,900 KRW in early May but has since declined to around 65,000 KRW recently. Hanwha Life's stock price, which rose to 4,590 KRW in May, has fluctuated and currently dropped to the 2,900 KRW range. The situation in the non-life insurance industry is similar. Samsung Fire & Marine Insurance's stock price reached a 52-week high of 253,000 KRW at the end of October but has since fallen to 204,000 KRW. This reflects the expectation of poor performance next year due to the base effect of COVID-19. The combined net profit of the insurance sector, including Samsung Fire & Marine Insurance, DB Insurance, Samsung Life Insurance, and Hanwha Life, is estimated to decrease by 14.1% to 3.5607 trillion KRW next year compared to this year.

However, for non-life insurers, it is analyzed that they will benefit more in the second half of the year as the IFRS17 accounting standard is introduced in 2023. Lee Hong-jae, a researcher at Hana Financial Investment, said, "Next year is the time to shift focus to IFRS17, the accounting standard to be introduced in 2023. At the very least, the direction is that non-life insurers will see a significant increase in reported profits and losses, and contract service margins will be amortized, smoothing profits and enhancing profit visibility."