Major South Korean financial holding companies are expected to continue profit growth in the third quarter this year. Earnings growth at their securities units, which helped lift second-quarter results, is expected to slow. Still, expanded corporate lending by banks and profit and loss improvements from exchange-rate swings are seen partly offsetting that. The market is watching whether major financial holding companies can post the highest-ever annual net profit this year.

The big four financial holding companies (KB, Shinhan, Hana and Woori) are set to report third-quarter results this year, starting with Hana Financial Group and Woori Financial Group on Oct. 23, followed by Shinhan Financial Group on Oct. 27 and KB Financial Group on Oct. 29.

Based on earnings forecasts from financial information firm FnGuide, the combined third-quarter net profit attributable to controlling shareholders at the big four is expected to total 5.626 trillion won. The figure was compiled as of Oct. 16 and is about 2.5 percent higher than a year earlier (5.4863 trillion won).

Among the individual holding companies, KB Financial Group is expected to post the largest net profit. Its third-quarter net profit is estimated at 1.8434 trillion won, up 9.3 percent from the same period a year earlier. Shinhan Financial Group is forecast at 1.6027 trillion won and Hana Financial Group at 1.2115 trillion won, up 12.6 percent and 7.0 percent, respectively.

Woori Financial Group's third-quarter net profit is expected to fall 22.2 percent from a year earlier to 968.4 billion won. It is the only one among the big four financial holding companies expected to post a decline, reflecting a base effect from one-off gains recorded last year during an insurer acquisition.

Securities profit growth slows; corporate loans help defend results

A key point in third-quarter results will be a change in how much banks and non-bank units contribute to earnings. In the first half, securities units led earnings growth as a stronger stock market boosted fee income from brokerage and wealth management services.

In the third quarter, non-interest income could fall from the previous quarter due to lower stock trading value and weak gains and losses from the valuation and disposal of securities as market interest rates rise. As a result, overall net profit for financial holding companies is expected to decline from the previous quarter.

With growth in the securities business slowing, banks' net interest income is expected to support results. Despite continued regulations on household lending, loan assets are rising as corporate credit and mortgage lending expand, broadening the base for interest income.

Still, growth in loan assets does not guarantee higher profitability. Higher market rates are also raising funding costs through deposits and bank bonds. The financial sector is projecting that banks' net interest margin (NIM) could fall from the previous quarter.

In the end, the key variables for bank performance are how much interest income banks can secure through asset growth driven by corporate lending, and how far they can offset downward pressure on profitability from rising funding costs.

Changes in the exchange rate are also expected to affect financial holding companies' results. A fall in the won-dollar exchange rate could improve foreign-exchange translation gains and losses depending on the mix of a financial company's foreign-currency assets and liabilities.

A positive effect is also expected in terms of capital adequacy. If the won value of foreign-currency risk-weighted assets (RWA) falls on a lower exchange rate, it could help improve the common equity tier 1 (CET1) ratio.

KB, Shinhan and Hana keep growth; focus on Woori's non-bank contribution

Performance differences among financial holding companies are expected depending on the earnings structure of non-bank subsidiaries and one-off gains and losses.

KB Financial Group is expected to post the largest net profit among the big four in the third quarter as well. Observers see bank credit growth centered on corporate finance, supported by earnings foundations at non-bank subsidiaries such as insurance and securities. Balanced earnings contributions from banks and non-bank units are also expected to help it maintain solid performance this quarter.

Shinhan Financial Group is expected to post the highest year-on-year net profit growth rate among the big four at 12.6 percent. Along with expanded bank interest income, one-off gains from the sale of a Shinhan Card office building could be reflected. Attention is expected to focus in the earnings announcement on recurring profit trends excluding such gains.

Hana Financial Group is expected to benefit from higher net interest income and profit and loss improvements from exchange-rate changes. In particular, analysts say Hana Bank's repricing cycle for loan assets is relatively short, meaning changes in market rates could be reflected more quickly in profitability. Hana Financial is also seen as relatively more sensitive to exchange-rate moves, raising expectations for non-monetary foreign-exchange gains and an improvement in capital ratios from a fall in the won-dollar exchange rate.

Woori Financial Group is expected to be affected in comparisons by a base effect from non-recurring gains recorded in the third quarter last year. In the process of acquiring Tongyang Life Insurance and ABL Life Insurance last year, it booked 581.0 billion won in bargain purchase gains. With such one-off factors disappearing this year, net profit is expected to decline from a year earlier.

The market is focusing less on the scale of Woori's net profit drop and more on whether earnings expand in non-bank businesses such as insurance and securities. As it pursues diversification of its business structure by making Tongyang Life Insurance a wholly owned subsidiary and strengthening its securities business, a key question is how much newly secured earnings sources contribute to group results.

Record annual net profit in sight; will shareholder returns keep expanding?

As financial holding companies are expected to continue year-on-year profit growth in the third quarter, attention is also turning to the possibility of setting a new annual record.

iM Securities estimated that combined net profit at the big four financial holding companies will reach 20.0742 trillion won this year, up about 11.8 percent from 17.9490 trillion won last year. It forecast KB Financial Group's annual net profit at 6.7801 trillion won and Shinhan Financial Group's at 5.7615 trillion won. Hana Financial Group and Woori Financial Group are projected at 4.2878 trillion won and 3.2448 trillion won, respectively.

Along with annual profit growth, attention is also on how much room financial holding companies have to expand shareholder returns. As they strengthen shareholder return policies such as dividends and share buybacks and cancellations, improvement in capital adequacy indicators such as the CET1 ratio is also seen as an important evaluation factor, alongside net profit.

Seol Yong-jin (설용진), an analyst at iM Securities, estimated that fee income at financial holding companies will slow in the third quarter due to lower securities trading value, but that foreign-exchange gains from a stronger won and improved insurance profit and loss would partly offset the burden from weaker non-interest income.

He added that the trend of expanding shareholder returns is expected to continue on the back of stable capital ratios at financial holding companies, but that the pace of expansion would slow compared with the early stage of the rollout of a value-up programme.