Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Financial risks squeeze non-banks, while boosting profits at banks
A signboard directs customers to the personal loan service section at a commercial bank in Seoul, in this photo taken in October 2021. Korea Times file
By Yi Whan-woo
By Yi Whan-woo
Financial risks deepened by costly borrowing rates are squeezing non-banking firms, such as brokerage houses and insurers, with liquidity shortages, while the situation doesn't seem all that bad for the banks.
The banking arms of the nation's four largest banking groups ― KB Kookmin, Shinhan, Hana and Woori ― posted record net profits of 13.85 trillion won ($9.82 billion) combined for the first three quarters of 2022.
Such windfall profits are driven by net interest income, which jumped 21.1 percent from a year earlier to 10.11 trillion won in the wake of the Bank of Korea's (BOK) steep rate hikes.
The BOK has delivered rate hikes five times since August 2021, and accordingly, the savings deposits in accounts with more than 1 billion won hit a record 787.9 trillion won as of June.
A sharp increase in bank reserves is also attributed to investors' growing preference for safe-haven assets.
Although it has returned to 3 percent for the first time in 10 years, investors see the benchmark interest rate here as less attractive compared to that of the United States.
The U.S. policy rate falls within the range of 3 percent to 3.25 percent following the Federal Reserve's 75-basis-point hike on Nov. 2.
Under the circumstances, foreign investors are pulling out money from the Korean stock market, which has in turn mostly been taking a beating this year and saw a fall in its trading volume.
The dwindling trading volume resulted in declines in brokerage fees and other sources of income for several brokerage arms of major banking groups in the third quarter.
For instance, NH Investment & Securities suffered the most with its net profit shrinking 94 percent year-on-year to 11.9 billion won.
Likewise, KB Securities saw a 27.7 percent year-on-year decrease in its net profit to 123 billion won.
The outlook remains bleak for the securities firms' earnings in the fourth quarter, according to industry sources, citing the latest default in project financing coming from the Legoland resort project in Gangwon Province.
The Gangwon provincial government promised later to fulfill a payment guarantee for the developer of Legoland Korea Resort by mid-December, after declaring a default on the provincial government-backed developer's bonds worth 205 billion won ($145.2 million).
The default announcement still resulted in distrust in the credit market and dented the fundraising capacities of securities firms, which are obligated to make repayments on bonds in the event of a default.
The rising interest rate is believed to be affecting insurers from raising money in the bond market, as seen from last week's announcements from Heungkuk Life Insurance and DB Life Insurance, respectively, on unusual delays in exercising their perpetual bond repayment option.
Heungkuk Life Insurance said it will postpone exercising a call option, originally scheduled for Nov. 9, for its dollar-denominated perpetual note worth $500 million.
DB Life Insurance also said it will delay exercising a call option for its bonds, from Nov. 13 to sometime in May next year.
The delay does not result in legal or regulatory consequences for the insurers.
But investors were spooked because such a delay hasn't been seen since 2009 and therefore they expected issuers to redeem them on the first optional call date.