Value context and insight. lkm@koreatimes.co.kr
Korean banks face setback in 2019
gettyimagesbank
By Lee Kyung-min
Global IBs warn against heavy reliance on interest income
By Lee Kyung-min
Major banks here are expected to undergo tough years ahead due to growing downside risks to sales and earnings caused by their heavy reliance on interest income and their weak non-banking sectors, global investment banks forecast Monday.
Against this backdrop, the investment banks called for the lenders to ramp up efforts to strengthen these sectors through mergers and acquisitions (M&As) while expanding overseas businesses as a means to boost profit and diversify risk management over the long term.
The prediction was based on the Korea Center for International Finance's (KCIF) analysis on recent reports released by several investment powerhouses, including Bank of America Merrill Lynch (BAML), Citi Research, J.P. Morgan, S&P Global Ratings, Moody's Investors Service and Nomura.
“Considering the headwinds from a macro slowdown and muted benefits from rising rates, we prefer banks with inorganic growth opportunities, which would lead to greater top-line growth and earnings diversification,” BAML said in its research paper.
Korean banks' net income from the nonbanking sector accounted for 23.7 percent, only around half that of global banks.
The comparable figure for Japan is 54.2 percent, followed by the U.S. (53.9 percent) and the U.K. (50.9 percent)
BAML added while the net interest margin (NIM), the difference between the rate a bank receives from loans and what it pays for deposits, will continue to increase, the magnitude will be smaller.
“We anticipate much smaller NIM benefits for banks at this stage. NIM expansion is mainly affected by regulatory pressure on lending spread expansion. As this stance is likely to be unchanged for the next one or two years, the pace of NIM expansion may slow down,” it said.
Moody's Investors Service forecast that Korean banks' balance sheets will be affected by slowing Korean economy.
In a recent report, Moody's Vice President and Senior Credit Officer Sophia Lee said the firm's 2019 outlook for Korean banks was stable, but risks for the banks are rising because of Korea's weakening economic growth.
J.P. Morgan echoed the view, saying that the Korean banks' earnings peaked out during 2017-18 period. It added that chances are limited for a policy rate hike in 2019.
“We take our stance on Korea banks a notch down from 'neutral' to 'cautious' given that we are concerned of increasing recessionary pressures, which will likely affect growth potential and credit cycle for the banks," it said in a report.
The pessimistic view followed a combined 21 percent drop in stock price of the nine financial services firms in 2018.
They include holding companies of Korea's top banks and other state lenders, such as KB Financial, Shinhan Financial, Hana Financial, Woori Financial and Industrial Bank of Korea (IBK).
“Foreign investors sold off 741 billion won ($ 662 million) in bank-related shares in the fourth quarter in 2018, which accounted for 20 percent of the 3.7 trillion won they sold off from KOSPI,” KCIF research Joo Hye-won said.
Given the banks take up only 5 percent of the KOSPI, the foreign sell-off was the main reason behind the banks' stock price drop, she added.
The bearish run came despite the banks' record-high performance in 2018 as the market took into account “worrisome” factors including their heavy reliance on net interest margin (NIM).
Korea's top five banks ― Shinhan, KB Kookmin, KEB Hana, Woori and NongHyup ― reported a net income of 9.7 trillion won in 2018, a 21 percent increase from 8.4 trillion won a year earlier.
However, the handsome performance came due in large part to a 2.8 trillion won increase in their interest income, a 10.5 percent rise from a year earlier.
Their net income from the nonbanking sector dropped to 3.7 trillion won from 4.5 trillion won, a reason the investment houses said necessitates they adopt long-term measures.