KB Financial Group posted 441.9 billion won more net profit than Shinhan Financial Group in the first half of this year, leading the holding-company earnings race. But Shinhan Bank earned 233.1 billion won more than KB Kookmin Bank. The split rankings between the holding companies and their banks reflected a performance gap in the non-bank business, especially securities units.

The financial sector said on July 23 that KB Financial's first-half net profit rose 13.1 percent from a year earlier to 3.88 trillion won. Shinhan Financial posted 3.44 trillion won, up 13.3 percent on the year.

Shinhan Financial's net profit growth rate was 0.2 percentage points higher than KB Financial's, but KB Financial led by 441.9 billion won in profit size. KB Financial's second-quarter net profit was 1.99 trillion won, 172.1 billion won more than Shinhan Financial's 1.82 trillion won.

KB Financial also led in profitability and capital strength. Based on each company's releases, first-half return on equity was 14.09 percent for KB Financial and 12.37 percent for Shinhan Financial. KB Financial was 1.72 percentage points higher. Its common equity tier 1 ratio was 13.74 percent at end-June, 0.31 percentage points above Shinhan Financial's 13.43 percent.

KB Financial lifted results as stable net interest income was joined by capital-market related fee income. First-half net interest income rose 1.7 percent from a year earlier to 6.48 trillion won, while net fee income jumped 50.6 percent to 2.96 trillion won. Shinhan Financial also posted broad-based growth, with interest income up 7.7 percent to 6.16 trillion won and non-interest income up 19.7 percent to 2.64 trillion won.

They also differed in shareholder returns. KB Financial plans to buy back and cancel an additional 700.0 billion won of treasury shares in the second half and return a total of 3.70 trillion won to shareholders this year. Shinhan Financial presented total shareholder returns of 2.80 trillion won plus alpha, including 1.40 trillion won in annual cash dividends and at least 1.40 trillion won in share buybacks and cancellations.

BANK NET PROFIT LED BY SHINHAN... MARGIN AND ASSET QUALITY LED BY KB KOOKMIN

Unlike holding-company results, Shinhan Bank led KB Kookmin Bank in the banking business.

Shinhan Bank's first-half net profit rose 8.5 percent from a year earlier to 2.46 trillion won. KB Kookmin Bank posted 2.23 trillion won, up 1.7 percent. Shinhan Bank earned 233.1 billion won more than KB Kookmin Bank.

Shinhan Bank increased interest income on improved net interest margin and growth in loan assets, and it managed selling and administrative costs and credit costs in a stable manner. KB Kookmin Bank also saw an expansion in wealth-management fee income, but its net profit growth rate was lower than Shinhan Bank's.

Some operating indicators that make up profitability and asset quality were led by KB Kookmin Bank. The bank NIM in the second quarter was 1.74 percent at KB Kookmin Bank, 0.13 percentage points higher than Shinhan Bank's 1.61 percent.

KB Kookmin Bank's won-denominated loans rose 2 percent from the end of last year to 385 trillion won. Shinhan Bank's won-denominated loans increased 1.8 percent to 340.34 trillion won. The corporate loan growth rate was 3.4 percent at KB Kookmin Bank, higher than Shinhan Bank's 2.8 percent, while the household loan growth rate was 0.5 percent at both banks.

The delinquency ratio at end-June was 0.27 percent at KB Kookmin Bank and 0.34 percent at Shinhan Bank. The non-performing loan ratio was also lower at KB Kookmin Bank, at 0.28 percent versus Shinhan Bank's 0.31 percent. Shinhan Bank led in the size and growth rate of bank net profit, but KB Kookmin Bank held a relative edge in margin and soundness indicators.

THE NON-BANK GAP DRIVEN BY KB SECURITIES

The key factor that enabled KB Financial to beat Shinhan Financial in holding-company net profit despite lagging in bank results was the non-bank business.

The non-bank share of net profit from KB Financial's entire group affiliates was 44 percent, 9 percentage points higher than Shinhan Financial's 35 percent.

The gap widened particularly in securities affiliates. KB Securities' first-half net profit was 796.3 billion won, up 135 percent from a year earlier. Shinhan Investment Corp. posted 577.7 billion won, up 123.1 percent, but KB Securities earned 218.6 billion won more.

KB Securities expanded earnings in key businesses such as wealth management and sales and trading, supported by a booming capital market and a capital increase. KB Securities' share of group net profit also rose to 21 percent. Shinhan Investment Corp. also increased earnings from stock brokerage commissions, financial product fees and product management income, but it did not narrow the net profit gap with KB Securities.

In the card business, Shinhan Card led in absolute size. Shinhan Card's first-half net profit was 253.4 billion won, 34.5 billion won more than KB Kookmin Card's 218.9 billion won. But KB Kookmin Card's growth rate was 20.7 percent, far above Shinhan Card's 2.8 percent.

The insurance business weighed on both groups. KB Insurance's net profit fell 14.2 percent to 478.8 billion won as loss ratios rose for auto and long-term insurance, while KB Life posted 150.6 billion won, down 20.4 percent. Shinhan Life also saw net profit fall 15.6 percent to 290.6 billion won, as insurance profit declined due to wider variances between expected and actual claims payouts.

Ultimately, KB Financial's non-bank advantage is seen as a result of KB Securities' sharp profit jump offsetting weakness in insurance and a disadvantage in bank net profit, rather than gains across all non-bank affiliates.

KB Financial injected 700.0 billion won into KB Securities in February and decided to allocate an additional 1.0 trillion won in July to grow non-interest income and secure future growth engines.

With capital reallocation aimed at moving beyond bank-centred competition and nurturing securities as a core profit source showing results in the first-half performance, future competition between KB and Shinhan is expected to hinge on non-bank profitability and capital utilisation capabilities.

"NIM EXPECTED TO RECOVER IN SECOND HALF... DEFEND CAPITAL-MARKET INCOME"

KB Financial CFO Sang-rok Na (나상록) said on a conference call, "In the second half, NIM will gradually show an improving trend as effects from a benchmark rate increase, asset-liability refreshing and normalisation of the funding structure are reflected." He said, "Therefore, on a full-year basis, we expect it to improve compared with last year, unchanged from our outlook at the beginning of the year."

He added, "We will continue to actively expand investment for future growth, while strengthening export revenue-generating capacity and efficiently managing recurring costs in parallel to maintain a trend of stabilising the group's CIR downward."

On earnings prospects linked to capital-market volatility, he said, "With large volatility in the stock market, it is hard to say with confidence that capital-market fee income will continue to stay at the current level." He added, "But even if trading value has recently eased somewhat, we see the market size itself as having grown by a step compared with the past." He said he judged that related fee income could stay at a higher level than last year.

He said, "Even if fee income declines somewhat, there are large deals scheduled in the CIB business in the second half, and if they proceed as planned, fee income related to productive finance could partially make up for the decline."