COVID-19 pushing banks to pursue stability over profitability

Bank clerks work at a sales office on Yeouido, Seoul in this file photo. Yonhap

By Lee Min-hyung

The spread of COVID-19 is pushing local banks to focus on soundness over profitability.

With the pandemic escalating business uncertainty in every aspect of the economy, the banking industry is actively bracing for heightened unpredictability in the post-virus era.

Commercial lenders are pressured to apply proper measures in terms of expanding risk management capabilities, as they face a growing burden over their massive anti-virus loans offered to the market. It's unlikely for these lenders to immediately retrieve the expanded loans in a timely manner as concerns persist over second and third waves of the virus spread here.

The nation's four major financial holding companies ― such as KB, Shinhan, Hana and Woori ― piled up allowances worth 730.5 billion won ($612 million) in the first quarter of this year, up 9.5 percent from a year ago. They are also considering expanding the size, as it is still relatively small in comparison with that from other developed countries such as the United States.

Banks from the world's largest economy elevated an allowance of $25 billion during the first three months combined, up by 350 percent from a year ago. Lenders from Europe also hiked its figure to 22 trillion won, up 269 percent from the previous year.

“Starting from the second half of 2020, we expect the real economy here and abroad to be on the decline due to the pandemic spread,” KB Kookmin Bank CEO Hur Yin said. To tackle this, the lender underlined the need to maintain soundness in a preemptive manner by double-checking any potential risks, according to him.

Shinhan Bank CEO Jin Ok-dong also concurred that the COVID-19 outbreak has led the lender to run its business with a focus on maintaining its financial soundness.

Kiwoom Securities senior analyst Seo Young-soo said the lenders are expected to operate with a focus on strengthening their business stability, rather than expanding investment for new growth areas.

“Korean banking players will make sure their businesses are stable enough by minimizing potential risk factors,” the analyst said. “They will also likely carry out shareholder-friendly policies by expanding the allowance for bad debts and capital, and the change will serve as a decisive momentum to reevaluate banking stocks.”

Beyond the virus-oriented market volatility, uncertainties surrounding banks will remain in place, as they have been mired in a series of scandals over mis-selling of private equity funds (PEF), according to Hana Financial Investment analyst Choi Jung-wook.

“The uncertainties surrounding the PEFs exist, and this comes as a short-term burden to banks,” the analyst said.

Local lenders ― such as Woori Bank and Hana Bank ― have been involved in a recent controversy surrounding a Hong Kong-based PEF. The lenders as well as securities firms sold the PEF worth more than 1 trillion won to local investors.

Concerns have recently surfaced that investors in the PEF are facing losses after it decided to suspend redemption of funds. “The issue will end up shrinking investors' confidence in bank stocks,” the economist said.

He argued one key issue affecting banks' second-quarter earnings will be how much loss they have incurred from the mis-selling of PEFs.