Financial sector set to struggle in coming years

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Financial sector set to struggle in coming years

Financial companies in Korea are expected to fare poorly over the next few years as the economy is hitting a low-growth trend with a low-rate policy, the financial regulator said yesterday.

The Financial Supervisory Service (FSS) forecast that financial companies here will likely underperform in 2013, with a substantial number of players to see losses in the following years if the low-growth pattern continues.

“The financial sector grew at 6 percent in 2010 and 3.6 percent last year. We’re expecting 2 percent this year and hopefully 3 percent in 2013, but most companies are expecting the worst,” FSS Gov. Kwon Hyeok-se told reporters on Friday.

An FSS estimate showed that if the economy slows down by one percentage point and the central bank cuts the key rate by the same margin, the combined net profit of 18 local banks will plunge 83.5 percent to 1.4 trillion won ($1.29 billion) in 2017, compared with the tentative 8.5 trillion won expected for this year.

Based on the hypothesis, Korean banks could swing to a net loss of 5.2 trillion won in 2022. Last year, banks raked in a record 11.8 trillion won in net profits.

The FSS said the case for insurance companies and brokerages will be much the same as that for banks as low rates are expected to squeeze their profits. The watchdog did not give specific estimates on financial firms apart from banks.

The watchdog’s outlook came as the local economy loses steam amid the global economic downturn. The Korean economy grew 0.1 percent on-quarter in the third quarter, the slowest since the first quarter of 2009, raising concerns that Korea is entering the trend of low growth.

To help prop up the economy, the Bank of Korea cut the benchmark rate twice this year to 2.75 percent, by a quarter percentage point each in July and October.

On the domestic front, a high level of household debts and the faltering property market should be handled with the utmost priority as they have been bugbears for the economy, the FSS noted. Korea’s household debts hit an all-time high of 937.5 trillion won as of the end of September, tantamount to about 78 percent of the country’s gross domestic product for 2011.

The watchdog vowed to keep tabs on the moves in the financial firms in terms of their potential risks and financial soundness, while continuing to stabilize household debt and corporate financing.

“We’ll make sure the financial firms are capable of absorbing losses and set aside reserves and secure liquidity to brace for the coming risks,” Kwon added.


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