Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Financial holding groups' Q1 earnings hit by HK-tied ELS compensations
An office area at Woori Bank's headquarters is seen in Seoul in this April 2023 file photo. Korea Times file
By Lee Yeon-woo
Banking also brace for impact
Major financial groups' plans to offer voluntary compensations over Hong Kong-tied equity-linked securities (ELS) are expected to impact their performance in the first quarter of this year, according to industry sources.
According to data from market tracker FnGuide, four major financial holding groups — KB, Shinhan, Hana and Woori — are anticipated to see a 9.31 percent decrease in their net profits for the first quarter of 2024, or 4.49 trillion won ($3.3 billion), compared to the same period last year.
Their weak performance is primarily due to the repercussions of compensating investors who incurred significant losses over the ELS linked to the performance of the Hang Seng China Enterprises Index.
"Following the banks' decision to offer voluntary compensation for the ELS, and with some banks reported to have already made their initial compensation payments, the likelihood that the related losses will impact the first quarter financial outcomes has increased," Choi Jung-wook, an analyst at Hana Securities, said.
For compensations, banks are compelled to set aside substantial provisions throughout this year, with the industry expecting this figure to reach 2 trillion won. This is adding strain on banks' finance, given that they have been already increasing the provisions in response to high interest rates and rising delinquency rates.
Market observers predict that KB Financial Group and its subsidiary, KB Kookmin Bank, which have sold the most amount of the ELS, are likely to relinquish their leading positions in the industry.
"For the year 2024, with anticipated reduction in policy rates, a downward trend in net interest margin is expected. Additionally, losses from ELS compensations and a decline in fee-based income, due to investor reticence, are expected to significantly reduce profitability compared to 2023," Kim Kyung-keun, a senior researcher at Korea Investors Service, said.
However, the risk of a rapid decline in their capital adequacy is considered low, thanks to their steady common equity, according to Kim.
Financial Services Commission Chairman Kim Joo-hyun, third from left, presides over a meeting with banks' CEOs at a conference room in Seoul, Monday. Yonhap
Financial losses are not the only concerns casting a shadow over the banking industry. Financial authorities are expected to tighten their grip on the industry, citing potential mis-selling issues.
Market speculation suggests that fines, depending on the extent of the compensation, could reach into the trillions of won. Financial authorities have also hinted at the possibility of imposing sanctions on executives, including CEOs, for failing to maintain adequate internal controls.
In response to criticism about the appropriateness of banks selling high-risk products, the authorities are also in the process of reviewing the regulatory framework.
Efforts to proceed with sanctions and implement regulatory reform are expected to intensify between April and May.
Meanwhile, banking shares began to decline after the announcement of compensation plans. Industry officials anticipate that stock prices may go through an adjustment until the release of their earnings reports, slated for the end of April.
"Since the beginning of the year, bank stocks have experienced a significant surge, increasing by over 30 percent in a short period, which indicates signs of overheating. The momentum of stocks with low price-to-book ratios, previously buoyed by the Corporate Value-up Program, is now generally diminishing," Choi said.
Choi added, "Given the likelihood of earnings falling short of consensus due to compensation costs, an adjustment phase in the market seems inevitable."