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Virus, fund misselling shake up list of Korea’s top banking groups

KB Financial, free from fund fiasco, replaces Shinhan’s top banking position

Industrial Bank of Korea headquarters, left, and Woori Bank headquarters, both located in central Seoul. (Yonhap)
Industrial Bank of Korea headquarters, left, and Woori Bank headquarters, both located in central Seoul. (Yonhap)

The coronavirus pandemic and the recent fund misspelling fiasco have reversed South Korea’s list of top financial groups, propelling those who dodged bullets to the top with better-than-expected second-quarter earnings, data showed Tuesday.

Of the major institutions that have disclosed their second-quarter earnings, Woori Financial Group and Shinhan Financial Group -- which their flagship lender and brokerage units were accused of misselling either derivatives-linked funds or now-frozen funds managed by Lime Asset Management -- saw their net profit plummet on-year by 45.3 percent and 12.3 percent to 682.1 billion won ($570.2 million) and 873.1 billion won, respectively.

Their weak second-quarter performances allowed KB Financial Group to snatch the throne from Shinhan Financial, boasting net profit of 981.8 billion won, which had gained nearly 1 percent on-year, despite coronavirus risks.

KB Financial is followed by Shinhan Financial and Hana Financial Group with Woori Financial now ranked No.4.

While the financial institutions tried to downplay the risks, misselling of troubled funds played a key part in dragging down their net profits. They had to set aside appropriation for compensation to customers who suffered losses from the funds and to mend cracks from other related risks, unlike KB, which has been free from such charges.

Shinhan Financial’s brokerage unit Shinhan Investment Corp., for example, apparently had to set aside 124.8 billion won in the second quarter for the troubled derivatives-linked fund worth a combined 380 billion won they allegedly missold to customers. The brokerage reportedly set aside a total 201.7 billion won to combat risks related to the issue, which in turn affected its holding group’s performance.

Woori Financial Chairman and CEO Sohn Tae-seung also admitted DLFs as a key factor that led to its weak performance, saying the figure was due “to the longer-than-expected coronavirus pandemic outbreak and investments to counter uncertainties related to private equity funds,” in a statement.

Woori Financial’s flagship bank sold the largest amount of troubled Lime funds worth a combined 357.7 billion won and was fined 19.7 billion won by the Financial Supervisory Service earlier this year for misselling derivatives-linked products tied to bond yields of major economies.

Hana Financial, meanwhile, reported a second-quarter net income of 693.9 billion won, up 4.2 percent from a year earlier, despite being a key sales channel for DLF products, due to the robust performance of its nonbanking units.

The financial groups may have posted varied results, but most of their net interest margins –- a key barometer for the institutions’ profit from yields and interests –- slipped, extending the downward momentum it gained in the second-half of last year. KB Financial and Shinhan Financial’s NIM slid by 10 basis points and 2 basis points on-quarter to 1.74 percent and 1.84 percent, respectively. Woori Financial shed 5 basis points to 1.58 percent, while Hana Financial’s figure remained flat at 1.62 percent.

An official at KB Financial cited the drop in the benchmark interest rate for the dip in NIMs.

“The policy rate fell by 75 basis points, which led to a drop in market interest rates and a decline in NIM,” the official said.

The Bank of Korea has been keeping the interest rate frozen at the record-low of 0.5 percent since its rate cut decision in May, to minimize the economic fallout from the pandemic.

DLF products were designed to earn large amounts of money when interest rates of major economies stay above a certain level.

The products, however, suffered as bond yields in the US, Britain and Germany unexpectedly plummeted weighed down by speculation that central banks in major economies might aggressively slash their base rates.

Many consumers have reported losses of up to or over 90 percent of their investments after interest rates or bond yields in the major economies tumbled.

By Jung Min-kyung (