4 Major Banks Facing Hong Kong ELS Setback Expected 5% Increase in 2Q Net Profit

Major domestic financial holding companies are expected to record slight earnings growth in the second quarter of this year. In the first quarter, each company experienced a significant decline in earnings due to the Hong Kong H-Share Index (Hang Seng China Enterprises Index·HSCEI)-based equity-linked securities (ELS) incident. The industry expects that the banking sector's strong performance is likely to continue for the time being, citing factors such as the delayed interest rate cuts in the United States.

According to financial information analysis firm FnGuide on the 9th, the consensus net income attributable to controlling shareholders of the four major domestic financial holding companies (KB, Shinhan, Hana, Woori) was estimated at 4.504 trillion won. This represents a 5.2% (222.7 billion won) increase compared to the previous year (4.2813 trillion won).

By company, Shinhan Financial Group is projected to post net income of 1.3034 trillion won, up 5.26%. Hana Financial Group is also expected to record net income of 940.5 billion won, an increase of 2.37%. Woori Financial Group showed the largest growth among the major financial holding companies, with net income expected to rise 28.90% to 805.9 billion won.

KB Financial Group is forecasted to reclaim the 'leading bank' position by posting net income of 1.4542 trillion won, surpassing Shinhan Financial Group. In the first quarter, KB Financial's final net income was around 1 trillion won due to the largest Hong Kong ELS provision liability (862 billion won) among all banks, which caused it to lose the top spot to Shinhan Financial. However, unlike the other three financial holding companies, KB Financial's net income is expected to decrease by 3.00% compared to the previous year.

The improvement in financial holding companies' earnings is attributed to the base effect from the Hong Kong ELS provision liabilities in the previous quarter, aggressive expansion of corporate loans by each company to grow their market share, and the recovery of non-bank sector earnings. According to the financial sector, Shinhan Bank increased corporate loans by 6.3 trillion won year-on-year in the first quarter alone, while Hana Bank and Woori Bank expanded corporate credit by 4.6 trillion won and 4.1 trillion won, respectively. Even KB Financial, which had a relatively smaller increase, expanded by 1.9 trillion won.

Each company has been focusing heavily on corporate loans since last year due to the real estate market downturn and regulatory restrictions making it difficult to expand household loans. Woori Bank established a corporate finance-specialized channel called 'BIZ Prime Center' last year and opened new branches in Guro, Seoul, and Pangyo, Gyeonggi Province, just last month. Shinhan Bank also established a corporate finance-specialized organization called 'SOL Cluster' in Suwon at the beginning of the year.

The financial sector expects that the delayed timing of the U.S. Federal Reserve's interest rate cuts and the effects of large-scale provisions made last year will likely lead to continued unexpected growth in the second half of the year. Park Hye-jin, a researcher at Daishin Securities, stated in a recent report, "Although it was anticipated that the Fed would cut rates twice in the second half of this year, leading to an inevitable decline in net interest margin (NIM), the U.S. economy is not weakening easily, and geopolitical risks involving Iran and Israel are escalating, increasing the likelihood of a delay in the timing." She added, "Even if the growth of won-denominated loans is somewhat sluggish, margins are expected to be maintained."

She continued, "Since the banking sector generally reflected large-scale loan loss provisions in the fourth quarter of last year, the main driver of earnings improvement will be the reduction in loan loss expenses. As burdens related to project financing (PF) and overseas real estate decrease, securities earnings are expected to improve, and insurance earnings are also projected to improve due to solid new contracts and investment gains, so non-interest income is expected to be favorable as well."