Korean banks face earnings drag despite stock market rally

(Lee Chung-woo)

South Korean bank stocks are expected to post fourth-quarter results that fall well short of market expectations, weighed down by a series of one-off costs including fines related to equity-linked securities and bond valuation losses.

With near-term profitability under pressure, investors are closely watching whether shareholder return momentum — including capital strength and dividends — can be sustained into next year.

According to financial data provider FnGuide on Thursday, the combined net profit forecast for bank stocks ranked first through ninth by market capitalization for the fourth quarter of last year stood at 3.41 trillion won ($2.35 billion).

This marks a decline of more than 100 billion won from the fourth-quarter profit forecast of 3.52 trillion won released in September last year.

Some analysts warn that mounting headwinds in the fourth quarter could drag bank earnings far below consensus. An analysis released a day earlier by Hanwha Investment & Securities projected combined fourth-quarter net profit of just 2.63 trillion won, more than 20 percent below market expectations.

The forecast reflects anticipated bond valuation losses stemming from higher market interest rates, along with increased credit costs tied to regulatory fines.

Profit outlooks deteriorated sharply after the Financial Supervisory Service in late November issued advance notices of fines totaling 2 trillion won against five banks — including KB Kookmin, Shinhan, Hana, NongHyup and SC First Bank — over mis-selling of equity-linked securities.

Banks also faced additional burdens after contributing a combined 360 billion won to a government-led bad bank scheme by the end of last year, following debt relief measures for long-term delinquent borrowers.

Kim Do-ha, an analyst at Hanwha Investment & Securities, said that after factoring in bond valuation losses, bad bank contributions and fines at some institutions, all nine banks are expected to miss consensus earnings. She added that fines for the three largest banks were reflected at 50 percent of the amounts notified by regulators.

There is also growing speculation that potential fines related to alleged collusion on loan-to-value ratios in mortgage lending — previously flagged by the Fair Trade Commission — may be partially front-loaded into fourth-quarter results.

Choi Jung-wook, an analyst at Hana Securities, estimated that if fines related to equity-linked securities and loan-to-value issues are recognized in the fourth quarter, KB Financial could book costs of roughly 450–550 billion won, while Shinhan Financial and Hana Financial may each recognize around 200–250 billion won, and Woori Financial about 100–150 billion won.

Slowing loan growth due to tighter household lending regulations is adding to pressure. Net interest margins, contrary to earlier expectations, are now seen holding steady from the previous quarter or slipping by about 1 basis point, signaling a period of stagnation.

Still, analysts expect common equity Tier 1 ratios — a key metric tied to dividend capacity — to remain stable despite the impact of fines and one-off costs. If so, the shareholder return policies that helped lift financial stocks last year are likely to remain intact.

Market attention is now focused on quarterly dividend payouts and shareholder return plans to be unveiled alongside earnings releases in early February.

Choi said that if regulators delay reflecting operational risk-weighted assets until fines are finalized, the decline in CET1 ratios could be limited to around 10–20 basis points. He added that banks have already been managing capital conservatively by moderating loan growth, leaving ample room for shareholder returns.