"Strong Bank Performance May Slow in Q3"

[Image source=Yonhap News]

[Asia Economy Reporter Song Hwajeong] The strong performance growth of banks, which soared until the first half of this year, is expected to slow down. This is because increasing uncertainties surrounding banks are expanding the negative impact on their earnings.

According to Hana Securities on the 5th, the estimated net profit for the third quarter of financial holding companies such as KB, Shinhan, Woori, Hana, Industrial Bank of Korea, DGB, and JB is about 6 trillion won, slightly below market consensus. This represents an 11.0% increase compared to the previous quarter, but excluding the post-tax gain of 330 billion won from Shinhan Financial Group's sale of Shinhan Investment Corp.'s building, the figure is expected to be about 5.7 trillion won, reflecting only about a 5% increase.

Choi Jungwook, a researcher at Hana Securities, explained, "We expected a significant profit improvement in the third quarter as the conservative additional provisions of about 1 trillion won reflecting future economic outlook, which were set aside in the second quarter, disappear and the net interest margin (NIM) continues to rise, leading to an increase in interest income. However, recent financial market instability such as the sharp rise in market interest rates and the weakening of the Korean won is expected to cause weak non-interest income, which is the main reason for earnings falling short of consensus."

In the third quarter, total loan growth is expected to remain low at around 1.0% on average due to continued contraction in household loans. Although the bank NIM is expected to rise by about 6 basis points (1bp=0.01%), sustaining the increase in interest income, the impact of narrowing loan-deposit interest rate spreads will become more pronounced, causing the NIM increase of commercial banks to fall slightly short of expectations. In particular, due to the disclosure of loan-deposit interest rate spreads, banks are gradually lowering the interest rates on new loans, and with the decrease in low-cost deposits and increase in time deposits, pressure on funding costs is rising, leading to a significant slowdown in NIM growth for commercial banks. Woori Financial Group and Hana Financial Group are expected to see NIM increases of around 3bp, while KB Financial Group is expected to see about 1bp.

With the 3-year government bond yield briefly exceeding 4.5% and the won-dollar exchange rate surpassing 1,440 won at one point, financial markets have shown signs of instability, causing weak non-interest income and poor performance of securities affiliates, making it difficult for non-interest income to improve significantly. However, although the supervisory authorities may continue to recommend conservative provisioning in the third quarter, the scale is expected to be small, and credit costs are estimated to decrease significantly compared to the second quarter.

Researcher Choi said, "Generally, during periods of rising interest rates, banks are expected to benefit as NIM rises and interest income improves significantly. However, currently, as borrowers' interest burdens increase, political and financial authorities are likely to intensify pressure on banks to reduce loan-deposit interest rate spreads," adding, "Therefore, despite rising interest rates, the trend of NIM improvement in banks may weaken considerably compared to before."