Divergent Regional Finance 2Q Expected Report Card... Aftershocks of 'PF Risk'

The expected performance of the three regional financial holding companies in the second quarter is showing mixed results. Despite common adverse factors, BNK and JB Financial are expected to continue their growth, but DGB Financial, which is preparing for Daegu Bank's transition to a commercial bank, is anticipated to experience a decline in performance due to the impact of the real estate project financing (PF) crisis.

[Image source=Yonhap News]

According to FnGuide, a financial information analysis firm, the forecasted net income attributable to controlling shareholders for the three major regional financial holding companies (BNK, DGB, JB) in the second quarter is 509.7 billion KRW. This represents a 1.84% increase compared to the same period last year (500.5 billion KRW). However, this growth is somewhat below the approximately 5% net income growth expected for the four major domestic financial holding companies (KB, Shinhan, Hana, Woori) during the same period.

However, the net income forecasts vary by company. BNK Financial is expected to post a net income of 216.3 billion KRW, up 10.41% (about 20.4 billion KRW), and JB Financial is projected to earn 169.2 billion KRW, an increase of 3.93% (about 6.4 billion KRW). Despite common challenges such as rising delinquency rates due to regional economic downturns and real estate PF risks, improvements in the performance of key subsidiaries like banks and capital companies are likely to continue.

On the other hand, DGB Financial is expected to record a net income of 124.2 billion KRW, down 12.4% (about 17.6 billion KRW). DGB Financial had already reported a 33.5% decrease in net income to 111.7 billion KRW in the first quarter compared to the same period last year, raising the likelihood of two consecutive quarters of negative growth.

While all regional financial holding companies face the adverse factor of deteriorating asset quality due to regional economic downturns, the real estate PF issue is a particular constraint for DGB Financial. In the first quarter, DGB Financial set aside 159.5 billion KRW in loan loss provisions. The real estate PF problems of affiliates such as Hi Investment & Securities and DGB Capital are hampering performance.

According to Korea Credit Rating, as of the end of last year, Hi Investment & Securities' real estate finance exposure was about 1 trillion KRW, approximately 81% of its equity capital. This is significantly higher than the average of mid-sized securities firms (33%). In particular, the proportion of bridge loans is about 540 billion KRW, with about 76% being mezzanine and subordinated loans. The main PF, approximately 360 billion KRW, is heavily weighted toward residential and metropolitan area projects, but this too has about 78% mezzanine and subordinated loan exposure.

In an early June report, Shinhan Investment Corp. stated, "(DGB Financial) is experiencing worsening trends in key asset quality indicators such as loan loss cost ratio, non-performing loan (NPL) ratio, and delinquency rate. The company has announced aggressive restructuring of PF distressed projects within the year," adding, "Additional provisions for non-bank affiliates centered on securities are inevitable going forward."