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By Park Jae-hyuk
Korea's major commercial banks are enjoying solid earnings this year but experts say they face a deeply uncertain future as they are failing to reduce costs amid the onset of falling profits.
They warn that unless the banks revamp their business models and carry out reorganization to brace for digitization, it is likely that some of them will be crowded out of the market in the near future.
For the first three quarters of 2019, the nation's top four lenders ― Shinhan, KB Kookmin, KEB Hana and Woori ― collectively posted a 7.09 trillion won ($6 billion) net profit, a 7.6 percent decline from a year earlier and moving to a downward trend for the first time since 2015.
In addition, the financial authorities decided to prohibit them from offering investment opportunities in high-risk private equity funds, which had made up half of their non-interest income.
Unfavorable factors also include tightened regulations on loan to deposit ratios and competition with fintech firms, some of which are seeking to obtain licenses to become internet-only banks.
In spite of such factors weighing on their profitability, the four banks were found to have paid mounting personnel costs over the past few years.
According to regulatory filings, they collectively spent 4.34 trillion won on salaries in the first three quarters of 2019, up 5.9 percent from last year.
This means an employee of the top four banks was paid 72 million won in those quarters, compared to 63 million won in 2015 and 2016, and 69 million won in 2017, after President Moon Jae-in's inauguration.
Extrapolating from this, the annual salary of a worker at the top four will reach an average 96 million won.
Such a rapid rise in payroll costs is attributed to their union's request for higher wages, the payment of performance-based bonuses following record-high earnings in 2018, and the financial regulator forcing banks to "create jobs."
With the regulator checking on the number of jobs the banks have produced, they have chosen to ensure those of long-term employees, rather than the hiring of new ones.
Their regulatory filings showed that Woori Bank employees worked for the longest period at an average 16-and-a-half years, a slight drop from 16 years and seven months tallied four years ago.
KB Kookmin Bank employees worked for 16 years and four months, up from 15 years and nine months, while those at KEB Hana Bank worked jumped to 15 years from 14.
Shinhan Bank employees worked for the shortest period at 14 years and eight months, up from 13 years and eight months.
The increase has led to higher wages for long-term employees.
As the banks are facing falling productivity, experts have warned that Korean banks will not be able to avoid the restructuring that Deutsche Bank, UBS and other global banks underwent.
According to McKinsey & Company's Global Banking Annual Review, a third of 595 banks worldwide, including those in Korea, will not be able to survive the next downturn unless they revamp their business models.
"Given where many players in the banking industry are today, a serious downturn could be catastrophic for many," said Chira Barua, London-based McKinsey partner and co-author of the report. "This is a do or die moment."
The global consulting firm categorized banks into four groups ― market leaders, resilients, followers and challenged ― depending on their stability and profitability.
According to McKinsey, Korean banks are in a fierce rivalry, as they have market shares that slightly exceed 10 percent.
Although McKinsey did not provide details about them in the report, Korean banks are considered to belong to the "challenged" group, according to Hana Institute of Finance, the Hana Financial Group's think tank which analyzed the report.
Hana suggested that these "challenged" banks should prioritize cost reductions.
"The challenged group is expected to suffer lower profitability amid unfavorable market conditions, so it is necessary for them to pursue innovation focusing on zero-based budgeting," Hana Institute of Finance researcher Lee Ryoung-hwa said. "By setting up a new approach to costs, Korean banks should monitor efficiency of all its spending strictly. They should also need to make efforts to cut costs through monthly monitoring."
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