S. Korean lenders’ NP drops in 2019 due to high labor costs, less interest gain

South Korea’s four major lenders – KB Kookmin, Shinhan, Woori, and KEB Hana – are expected to post a fall in net profit this year for the first time in four years due to a rise in labor costs on top of a reduced interest gain in a low-interest rate environment.

According to an analysis by Maeil Business Newspaper on Sunday of third-quarter disclosures of four commercial banks KB Kookmin, Shinhan, Woori, and KEB Hana, the lenders spent a total 4.3 trillion won ($3.7 billion) as payroll in the first nine months of this year, topping the previous high of 4.2 trillion won recorded in the same period of 2015.

In 2016, the four lenders’ spending on staff salaries fell 2.9 percent from the previous year, 1.4 percent in 2017 before rebounding 1.3 percent last year and 5.9 percent this year, the analysis showed.

A significant increase in labor costs was mainly driven by a wage increase agreed during annual wage talks with the labor union, a surge in paid employee bonuses following last year’s record earnings, and addition in payroll amid ongoing pressure from the government for job creation.

As of the end of September, the four banks had 60,061 workers in total, rebounding from a drop below 60,000 between 2016 and 2018, but still smaller than 67,010 workers in the same period of 2015.

Although the number of employees fell by almost 7,000 over the last four years, the lenders’ labor costs increased. This suggests that relatively junior employees who are paid less than senior officials have left their jobs during companies’ voluntary retirement programs.

According to the analysis, the four lenders’ average annual salary per employee remained unchanged at 63 million won in 2015 and 2016 but increased under the current pro-labor administration to 69 million won last year and 72 million won so far this year. Since the Moon Jae-in government assumed the office, the country’s overall minimum wages increased significantly in two straight years. The banks’ average annual pay is expected to reach 96 million won per employee.

While grappling with high labor costs, the four lenders have been also suffering from a reduction in interest gain amid a protracted low-interest rate environment. As a result, their combined net profit in the first three quarters ended September retreated 7.6 percent from last year to 7.09 trillion won.

It is the first fall in net profit for the lenders in four years. Their combined net profit surged 43.3 percent on year in 2016, 27.4 percent in 2017, and 19.1 percent in 2018.

Industry insiders expect their bottom line to remain weak as banks will be banned from selling high-risk, high-profit derivative funds as announced by the financial authority last week to protect investors.

Yun Chang-hyun, professor at University of Seoul, advised the local financial industry to overhaul the traditional seniority-based salary payment system to stay competitive amid rapid changes in the industry with the ascent of fintech companies and open banking services.

[ⓒ Maeil Business Newspaper & mk.co.kr, All rights reserved]