Critical views on banks posting record profits

Some institutions find themselves treading carefully despite achieving strong financial results. Banks are one such example. Last year, they posted their highest-ever profits, yet the public reaction has been far from favorable, prompting them to adopt a lower profile. This response reflects concerns over the perception that their success stems not from financial innovation but from "easy interest-based business." In private conversations, however, bankers have voiced their frustrations, arguing that lending and earning interest are their core business activities and that they have simply done their job. They also point out their efforts to support economic recovery, such as extending loan maturities for small businesses in the aftermath of COVID-19.

Banks are, after all, businesses, and it is only natural for them to pursue profits. Given that loans are their primary product, it does not seem fair to criticize them for engaging in "interest-based business." However, in a year when most industries struggled due to an economic downturn, can banks genuinely claim that their record-breaking performance was the result of innovative and outstanding business operations?

A closer look at the numbers reveals that last year, South Korea's four major financial holding companies—KB, Shinhan, Hana, and Woori—generated approximately 42 trillion won in interest income, leading to a record-breaking net profit exceeding 16 trillion won. The key driver of this profit was still lending. The recovery of the real estate market fueled demand for mortgage loans and other loan products. Typically, a low-interest rate environment would squeeze bank profits. Still, banks maintained their earnings by keeping lending rates high under the pretext of financial authorities' "household loan management orders." In fact, despite policy rate cuts, banks adjusted their additional interest margins and preferential rates to keep overall lending rates steady.

Did these loans at least demonstrate superior quality? Ideally, banks should function as the financial lifeline of the economy, ensuring that promising small and medium-sized enterprises receive much-needed capital. While corporate lending at the four major banks has increased compared to the past, it still accounts for less than 60 percent of total loans. Moreover, many of these loans rely on collateral or guarantees rather than advanced credit assessment models, leading to concerns that limited financial resources are not being allocated efficiently. Their global presence also remains weak—Shinhan Bank Vietnam is one of the few with a noticeable presence in the international market.

Furthermore, even the long-held belief that banks can keep money safe has been shaken. When Lee Bok-hyun, the head of the Financial Supervisory Service, warned last year of a tough regulatory crackdown on banks, many initially dismissed it as mere posturing, thinking that South Korea's banking sector was already well-developed and unlikely to have major failures. However, the results were unexpectedly revealing. While the case of former Woori Financial Group Chairman Sohn Tae-seung's relatives receiving preferential loans was already known, investigations uncovered numerous other cases of improper lending, including bank employees colluding with brokers to approve fraudulent loans.

Given this backdrop, it is no surprise that the public views banks' record profits with skepticism. Those who have struggled with strict lending requirements firsthand are especially critical. In response, financial holding companies have recently begun reshuffling their boards and strengthening internal controls. They are also exploring new business ventures in an attempt to diversify their revenue streams beyond interest income. It is time for banks to rekindle their innovative potential, which has long been stifled by the shadow of government oversight, which is characteristic of the licensed business. After all, banks themselves must be weary of the recurring criticism over their reliance on interest-based profits. Hopefully, the day will come when banks achieve strong financial performance that truly deserves unreserved applause.