Banking groups under profit pressure by rate cut

South Korea’s major banking groups are operating under emergency systems to deal with impact by the central bank’s record-low key rate on the financial and forex markets.

The current 0.75 percent interest rate has been putting pressure on the commercial banks’ profit margins, analysts say, which in turn is likely to affect related stock prices amid the general shareholders meeting season this month. Commercial banks are the flagship business units of banking groups here.

“The larger-than-expected rate cut is expected to further drag down the banks’ profit margins by 0.14 percent to 0.15 percent range from the previous projections of 0.12 percent,” Choi Jung-wook, an analyst at Hana Financial Investment said.

The financial holding groups are mainly monitoring the markets to detect risks stemming from the rate change and the novel coronavirus, while taking the option of changing long-term business strategies into consideration.

Most importantly, their overseas business expansion plans announced in the beginning of the year are likely to be either delayed or changed for the time being.

Shinhan has decided to run a series of briefings on the current market situation until coronavirus risks are completely lifted.

Senior executives of the group, including the chief executive officer and the chief financial officer, will be attending the briefings while keeping eyes on the financial market and industries where its loans were extended to. It plans to invite market experts as well to consider their advice in the corporate decision-making process.

The financial holding group has also divided this year’s business plan into three different versions or scenarios -- normal, worsened, worst -- for the first time ever, and has been mulling to adjust the level from “normal” to “worsened” under the current situation. It is also checking to see if it can lower its net profit goal for this year.

KB has been analyzing the patterns the credit risks of its customers and different industries.

The latest risks are likely to pose as hurdles for the group’s plans to acquire Prudential Life Insurance. KB has been a strong competitor in the bid for the local insurer, with the bidding price projected to be around 2 trillion won ($1.7 billion). Other candidates include Woori Financial Group that partnered with IMM Private Equity and MBK Partners.

The main bid is scheduled for Thursday and the momentum for the event has been ruptured by risks of larger capital impairment due to lowered benchmark interest rate.

According to the watchdog Financial Supervisory Service on Tuesday, the local insurance firms’ combined net profit already fell to the lowest level in a decade last year, weighed down by increased auto insurance losses. The figure stood at 5.33 trillion won, down nearly 30 percent on-year, the preliminary data showed.

Woori has established a special control tower or a committee for risk management earlier this week, while Hana has been focusing on asset management at the tips of an economic downturn.

“With the current negative narrative surrounding derivatives and funds, it will be complicated for commercial lenders to generate profit outside of interest rates,” Choi added.

By Jung Min-kyung (mkjung@heraldcorp.com)