[INTERVIEW] Gov't move to break banking oligopoly not expected to cause major shifts

Kim Dae-hyun, S&P Global Ratings' director of the Financial Services Ratings group in Asia Pacific, poses in front of the firm's office in Seoul during a recent interview with The Korea Times. Korea Times photo by Anna J. Park

New entrants into mature banking sector need time to grow

By Anna J. Park

Despite financial authorities' recent decision to break the banking industry's de facto oligopoly and spur competition, the banking sector is not likely to see a major shift in its competitive landscape, S&P Global Ratings' senior credit analyst estimates.

"It is expected that it would take a long time for a new entrant to grow its presence significantly in Korea's mature banking market," Kim Dae-hyun, a director in S&P Global's Financial Services Ratings group in Asia-Pacific, said during a recent one-on-one interview with The Korea Times at his office in Seoul.

"The market shares of Korean banks will remain broadly stable at least in the coming few years," he added.

Early this month, the Financial Services Commission (FSC), the country's top financial regulator, announced a series of measures attempting to break the domestic banking oligopoly. The measures included granting more accreditations of banking licenses to competent new players, in order to foster a fairer and healthier competitive environment in the sector. Allowing easier conversion of regional banks into nationwide banks and promoting consolidation of mutual savings banks were also among the government's regulative initiatives.

The global credit ratings expert explained that while the financial authorities' moves to lower the banking industry's entry bar for new players will stimulate further product innovation and intensify pricing competition among local lenders, newcomers are not expected to materially challenge the existing banks' already-solidified market presence in the next few years.

Kim pointed to the introduction of internet-only banks in Korea in 2017 to make his point. Compared to other countries, Korea's three digital banks ― KakaoBank, K bank and Toss Bank ― are seen as having achieved huge success, garnering millions of customers in a short period of time. However, the country's banking landscape has been largely stable over the past decade despite their joining the market.

"Korea's three internet-only banks ― KakaoBank, K bank and Toss Bank ― have taken up a small presence thus far, collectively comprising only about 1.5 percent of the entire loan balances among deposit-taking institutions, as of end-2022," Kim said, explaining that deposit-taking institutions include domestic banks (including internet-only banks), mutual credit co-operatives and savings banks.

"Even when being calculated in terms of the total amount of deposits made at a bank, the three internet-only banks' aggregated market share in the country is about 2 percent. Banks in Korea make up roughly 70 percent of the entire market, followed by mutual credit co-ops or credit unions' 25 percent and savings banks have a small presence," Kim said, adding that the percentage composition is not that different in terms of the loan balances.

Kim said this is a natural consequence, considering the unique characteristics of the banking business; a bank cannot simply increase its assets and capital size drastically over just a couple of years, especially in a mature market where credit demands are not high. Excessive credit growth can result in higher credit losses. Underwriting and risk management capabilities would be tested. This means a new entrant into the Korean banking industry can hardly grow big enough to grab a significant market share in just a few years, making it difficult to challenge existing banks.

New potential players converted from regional banks are not much of an immediate challenge to incumbent nationwide lenders, either, for now. Daegu Bank, the representative bank of Daegu City and North Gyeongsang province, announced its plan to apply for conversion into a nationwide bank.

"It is not expected that Daegu Bank will expand aggressively into new areas, such as the Chungcheong provinces or Gangwon province which lack dedicated regional banks, considering the challenging operating conditions and relatively small market sizes of these provinces," Kim said. He pointed out that the two provinces account for about 6 percent of the total loans in Korea's banking system as of the end of 2022.

Busan Bank, another major regional bank of the southeastern part of the country, does not currently meet the qualification to convert into a national bank, as corporate entities collectively own 10.3 percent of the shares of the bank's parent group, BNK Financial Group. Under Korea's banking law, a corporate entity is not allowed to hold more than 4 percent of voting shares of a nationwide bank.

Furthermore, the senior analyst of the global ratings firm thinks that financial regulators will continue their strict stance when it comes to examining the qualifications of new applicants for getting banking licenses for the sake of the stability of the domestic financial system.

"Even if applicants succeed at garnering a banking license, it is still questionable how fast they will be able to exert pressure on existing banks. For instance, KakaoBank has been offering much innovation into the market during the past six years of operation, yet it still lags far behind traditional competitors in terms of business scale, apparently showing that it takes time for a new player to grow to be a material threat to the industry," Kim pointed out.

Yet, his prediction does not preclude fundamental changes in the longer term. If internet-only banks successfully scale up and more new internet-only banks enter, they would begin exerting much influence on the traditional banking system, Kim said.

Kim also expects the influx of new players into the banking sector will stimulate more pricing competition among peers, making it harder for local banks to be complacent when relying on interest profits. Such stimulation, on top of the financial regulator's move to impose stricter obligations of public disclosure to banks' interest rate spread, is expected to make the industry fairer and more transparent.

Local banks maintain stability amid potential risk factors

Regarding the outlook of the local banking industry, Kim called for extra caution in maintaining financial soundness.

"The Korean economy has logged a speedy expansion in credit during the pandemic era at a higher rate than the country's nominal economic growth rate. Normally, credit growth largely follows a country's economic growth rate. But the Korean economy's private-sector credit expansion rate was about 10 percent per annum in 2020 and 2021, which is way higher than the economy's nominal growth rate during the period," he said.

"This means an oversupply of credit, compared to the economic size, which could burden the market in terms of financial soundness, particularly amid global interest rate hikes that followed," he explained.

Kim also views an increased exposure to real estate project financing by non-banking institutions, such as securities firms, can present another potential risk factor to the economy.

Despite these risks, he stressed that the condition of local banks has remained stable by global standards. While the median rating of Asia-Pacific banks stands at A minus, the ratings of Korean commercial banks mostly stand between A plus and A, which is deemed high from a global perspective.

"All four major commercial banks are rated A plus, while policy banks, including the Korea Development Bank (KDB) and the Export-Import Bank of Korea, are rated at AA flat, equalized with the sovereign credit rating on Korea. Although Korea's private-sector leverage is high, the banks' adequate risk management and underwriting standards will likely mitigate potential credit risks. We expect the outlook on Korean bank ratings to remain stable," Kim said.

The ratings action by S&P Global Ratings is taking place year-round, whenever a material credit event takes place. Ratings are decided by a rating committee where several senior analysts covering the banking sector globally join as members, Kim explained.

Currently based in Hong Kong, Kim leads credit rating analysis of financial institutions in Korea and Mongolia. Before joining S&P in 2015, he worked as an equity analyst for the financial sector at CIMB Securities, J.P. Morgan Securities and CLSA Securities. Kim holds an MBA from the University of Hong Kong and a bachelor's degree in business administration from Yonsei University. He is a Chartered Financial Analyst (CFA).