Trouble is growing for Korea's four major financial holding companies -- KB, Shinhan, Woori and Hana. There is growing concern that the four will face deteriorating profitability due to ultra-low interest rates, lending regulations, and the recent restriction in selling private equity funds.
The non-interest income of the four largest financial groups plummeted by 24.7 percent to 2,517.9 billion in the third quarter, said the Financial Supervisory Service on Nov. 18.
One reason for the drop is poor performances of the financial groups' brokerage and insurance affiliates due to a slump in the stock market and extremely low interest rates. A bigger reason is a sharp drop in the non-interest income of banks due to losses from derivative-linked funds (DLFs).
Woori Financial Group and Hana Financial Group which suffered substantial DLF losses, recorded the biggest losses due to sharp drops of 29.2 percent and 23.2 percent, respectively, in non-interest income. Shinhan Financial Group (-9.8 percent) and KB Financial Group (-5.9 percent) also suffered losses.
There is a strong possibility that banks' efforts to ramp up non-interest profits will fail as investment sentiment is frozen due to the loss of DLFs and the sale of private equity funds is blocked. NIMs have already begun to fall more sharply. The average NIM of the four major Seoul-based banks in the third quarter was 1.52 percent, down 0.09 percentage points from the same period last year. Although the decline slowed to 1.58 percent by the end of the second quarter, it sank by 0.06 percentage points in the third quarter.
Profitability is weakening while interest income declines as interest rate cuts and household loan regulations overlap. “The government criticize interest income as an easy way and regulates non-interest income, saying that it is dangerous,” a commercial banker said. “We can do nothing because we are completely blocked.”