Woori Finance Institute: "Korean Banks Should Pursue Asset Efficiency Like Japan"

Japanese Major Banks See Surge in Net Profits
Improved Profit Portfolios Through Sale of Unnecessary Assets
Korean Financial Firms Should Also Dispose of Low-Yield Assets to Enhance Shareholder Value

There is a growing argument that domestic financial holding companies should actively pursue asset efficiency measures?such as selling low-yield assets and utilizing idle real estate?similar to Japan’s major financial groups, in order to strengthen their profit-generating capacity. It is also pointed out that, for long-term development, they should focus investments on new growth engines such as new growth finance and digital transformation.

According to Woori Finance Management Research Institute on June 16, the three major Japanese financial groups?Mitsubishi UFJ, Sumitomo Mitsui, and Mizuho?achieved record-high net profits last year, marking a 25.3% increase compared to the previous year.

The increase in their net profits was partly due to improved interest income, but it is analyzed that the primary driver was the sale of policy-holding stocks. Policy-holding stocks refer to shares that Japan’s major banks acquired in a cross-shareholding arrangement with large Japanese corporations such as Toyota to strengthen business relationships. In particular, Mitsubishi UFJ, Japan’s largest bank, maintained its position as the top net profit earner for five consecutive years, thanks in large part to the sale of Toyota shares. A significant portion of the increased net profits among the three major Japanese financial groups last year is understood to have come from such stock sales. Japanese banks boldly reinvested the funds generated from selling policy-holding stocks into reorganizing their asset portfolios, expanding their businesses through mergers and acquisitions, and strengthening artificial intelligence (AI) and IT infrastructure, thereby improving the quality of their earnings.

Buoyed by the increase in net profits, the three major Japanese financial groups strengthened their shareholder return policies last year, including dividends and share buybacks. Mitsubishi UFJ’s shareholder return ratio reached 62.3% last year, while Sumitomo Mitsui’s was 61.7% and Mizuho’s was 51.5%?all significantly higher than those of Korea’s major financial holding companies, which have yet to reach 50%.

The institute predicts that this year, too, the net profits of the three major Japanese financial groups will increase by more than 10% compared to last year. Regarding interest income, it is expected that the upward trend will continue, driven by sustained growth in overseas operations, the impact of domestic interest rate hikes following the end of the zero-interest-rate policy, and the reorganization of bond portfolios. Non-interest income is also expected to remain strong, supported by the strengthening of global investment businesses, increased demand for asset management, and the reorganization of bond portfolios.

The institute emphasized that the profit improvements seen in Japanese financial companies provide important implications for the business direction of Korean financial holding companies. It pointed out that domestic financial companies need to continuously improve their profit structures by steadily selling low-yield assets, utilizing idle real estate, and enhancing management efficiency, as Japanese firms have done. The institute argued that efforts to improve asset efficiency should be used to boost profit-generating capacity through mergers and acquisitions (M&A). It also added that, in response to the interest rate cut cycle, Korean financial groups should strengthen their non-interest income capabilities to offset the slowdown in interest income growth, and continue to enhance their digital infrastructure, including AI.

Lee Kyunghoon, a senior researcher at Woori Finance Management Research Institute, stated, "Domestic financial groups should look to the example of Japanese financial groups, which have entered a new phase of growth by restructuring their asset portfolios after overcoming a period of undervaluation." He emphasized, "In addition to selling low-yield assets, they must concentrate their investment capabilities on areas for future growth in order to enhance long-term shareholder value."