Value context and insight. lkm@koreatimes.co.kr
Outlook bleak for financial groups due to high interest rates, mutual growth funds
Financial Services Commission Chairman Kim Joo-hyun, fourth from left, Financial Supervisory Service Governor Lee Bok-hyun, third from left, and heads of local financial groups pose at Korea Federation of Banks in Seoul, Nov. 20, 2023. Yonhap
By Lee Kyung-min
The performance of the country’s top financial groups will deteriorate in 2024, hamstrung by sustained high interest rates and hefty contributions to so-called mutual growth funds set up to help small businesses, market watchers said Friday.
About 2 trillion won ($1.5 billion) will be sourced for the mutual growth drive spearheaded by President Yoon Suk Yeol seeking to counter souring public sentiment over the past few pandemic years due mostly to rapidly climbing borrowing costs.
The groups will have to fortify non-interest income growth models, as underpinned by enhanced financial soundness, stronger global competitiveness and risk management capabilities.
According to FnGuide, a local financial data provider, the combined net income of the top four financial groups – KB, Shinhan, Hana and Woori – is likely to have averaged 16.5 trillion won in 2023. The 4.4 percent year-on-year increase is a new high, breaking the previous record set two years ago.
However, the onset of the monetary easing cycle around the world will diminish their income prospects, amplified by a slump in the real estate market.
Also weighing are repercussions of what the financial authorities suspect were irresponsible sales of equity-linked securities (ELS), high-risk derivatives tied to the performance of the Hang Seng China Enterprises Index.
The U.S. Federal Reserve signaled up to three rate cuts in 2024. The commercial lenders' source of income will see a marked corresponding drop, removing their surest and the most stable source of income.
The financial groups will have to fortify their ability to withstand financial shocks, as evaluated by strengthening loan-loss reserves raised to a combined 10 trillion won in 2023.
According to the Korea Institute of Finance, the reserve is up 2.2 trillion won from 2022.
“Commercial lenders will have to brace for a possible default occuring due to the extended period of borrowing built up over the past pandemic years amid overall heightened risks of delinquencies,” the institute said.