Deputy Prime Minister Hong "Coexistence Cooperation is Urgent"
Expecting Role Amid Small Business Difficulties
Four Major Banks' Last Year Net Profit 14.5 Trillion Won, Interest Income Up Due to Loan-Deposit Rate Spread
Experts "Government Role Including Incentives Also Important Now"
[Asia Economy Reporter Song Hwajeong] As banks and financial companies recorded record-breaking performances last year, voices calling for financial companies to expand their public roles are also growing louder.
On the 11th, Hong Nam-ki, Deputy Prime Minister and Minister of Strategy and Finance, said at the macro-financial meeting, "Cooperation among policy authorities as well as cooperation from the private financial sector is urgently needed," adding, "Since the private financial sector's profits are expected to reach an all-time high last year, if possible, we hope the financial sector will voluntarily take the lead in proactive win-win cooperation to alleviate the financial difficulties of small business owners even a little." This was interpreted as meaning that financial companies, which achieved record profits amid the upcoming expiration of the extension of small business loans and principal and interest repayment deferral measures next month, as well as recent interest rate hikes causing difficulties for small business owners and self-employed individuals, need to step up to resolve these hardships.
Bank holding companies recorded their highest-ever performance last year. According to the financial sector, the net profits of the four major financial groups?KB Financial, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group?reached 14.5429 trillion won last year. This is an increase of more than 34% compared to the previous year and the highest since 2019. The net profit of the four major banks alone reached 10.031 trillion won. In particular, interest income amounted to 34.7 trillion won. Dividends also increased significantly with the record performance. The total dividend amount (including interim dividends) based on the settlement results of the four major financial groups last year was 3.7505 trillion won, marking an all-time high. This is a 64% increase compared to 2.2929 trillion won in 2020, when dividends were reduced to prepare for the financial shock caused by the COVID-19 pandemic.
Negative public opinion has emerged regarding these record-breaking bank performances, accusing them of profiting from interest margins. This is because the widening interest rate spread between deposits and loans, caused by government loan regulations and interest rate hikes, led to a sharp increase in banks' interest income. According to the Bank of Korea, the interest rate spread between deposits and loans based on the balance at the end of December last year was 2.21 percentage points, the largest gap in two years and four months since August 2019 (2.21 percentage points). Consumer dissatisfaction is growing due to the widening interest rate spread. While loan interest rates have jumped sharply, deposit interest rates have only slightly increased. As the base interest rate rises and financial authorities tighten household loan regulations, banks are raising loan interest rates by increasing additional interest rates and reducing preferential rates. On the other hand, deposit interest rates apply only to a few products, with varying increases by product, and do not exceed the base interest rate hike level, so consumers do not feel a significant increase in deposit interest rates. Last year, a public petition appeared demanding banks to stop excessive profits.
In particular, government loan regulations also contributed to the widening interest rate spread. Professor Seo Jiyong of the Department of Business Administration at Sangmyung University pointed out, "With the implementation of the total loan volume system, loans have shifted to being supplier-oriented," adding, "Banks could not maintain net interest margins (NIM) due to competition, but as the loan leadership shifted to suppliers, additional interest rates increased and preferential rates decreased, widening the interest rate spread." He explained that while base interest rate hikes were inevitable, the total loan volume system further widened the interest rate spread.
It is natural for financial companies as private enterprises to pursue maximum profits, but the criticism of banks for their profit celebrations stems from the perception that banks are regulated industries and have previously received public funds, thus they should fulfill public roles. Banks are subject to entry regulations and must meet certain requirements and obtain approval from financial authorities to be established. Due to these entry regulations limiting competition, banks basically enjoy a certain degree of monopoly profits. Furthermore, during the foreign exchange crisis, the government injected massive public funds to rescue insolvent banks, and given the huge amount of taxes involved, public scrutiny of banks is inevitably stricter.
A financial industry official said, "The financial sector as a whole feels the burden of the profit celebrations," adding, "Financial companies are also making efforts to contribute to creating public value, such as supporting low-income finance and expanding social contributions."
Experts pointed out that the government's role is important to expand banks' public roles. Professor Seo said, "Incentives such as excluding mid-interest loans from total volume regulations should be provided to encourage public roles," adding, "Since there are few such government policies, banks are obsessed with profit generation, so the government's role is crucial to ensure publicness."
Senior Research Fellow Lee Byung-yoon of the Korea Institute of Finance said, "Since banks are private companies, pursuing profits is natural," adding, "Most of Korean banks' profits come from interest income, so it is necessary to properly examine whether risk premiums are correctly calculated and whether there is collusion among banks."
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