I’m currently managing director of Content and Business Planning at The Korea Times. Before I took the current position in early 2024, I served as managing editor in charge of both paper and online for over three and a half years. In 2015-2018, I worked as Singapore correspondent covering ASEAN nations.
Foreign banks in a fix
― Citibank, SC First struggling with anemic growth, sluggish profits ―
By Kim Jae-kyoung
By Kim Jae-kyoung
Major foreign banks operating here ― SC First Bank and Citibank Korea ― have gained unwanted attention after suffering from a poor business performance last year in the wake of the global financial crisis.
They are struggling with anemic growth and falling profits; in stark contrast to major Korean banks that have quickly recovered from the crisis by fixing their balance sheets and showing a handsome performance last year.
Citibank Korea, the banking arm of U.S.-headquartered Citi, posted a net profit of 315.6 billion won in 2010, only up 1.4 percent from a year ago. In particular, its non-interest income fell by 40 percent to 146 billion won.
The scorecard for SC First, the Korean unit of British banking giant Standard Chartered, is even gloomier. The lender saw its net income fall by 25 percent to 322.4 billion won during the same period.
There are a number of reasons for the foreign lenders’ lethargic performance, which could be seen as a one-off phenomenon, but in fact is rather a fundamental one caused by their outdated business model.
Unbalanced loan portfolio
The first and key culprit is their retail banking-focused business model, which they have stuck to since they entered the local market. They have not made much of an effort to diversify loan portfolios.
They focused mostly on extending loans to households or individuals, which are considered less exposed to credit risks, while shunning offering loans to small- and medium-sized enterprises. As a result, their portfolios are weighted excessively toward household loans, which have made them vulnerable to external shocks.
In 2010, the ratio of household loans to total won-denominated lending at SC First and Citibank reached 74.82 percent and 59.52 percent, respectively, compared with the previous year’s 72.61 percent and 59.52 percent; well above major Korean lenders’ average of around 40 percent.
Before being acquired by NewBridge Capital in 1999, Korea First Bank, a precursor of SC First, was a corporate banking-oriented lender. But the U.S. private equity reduced corporate lending and expanded mortgages and loans to households. This trend was continued after Standard Chartered took it over in 2005.
“Global banks operating here have had a simple business model with a focus on retail banking. They have sought to create profits by selling high-margin products, such as credit-based loans and mortgages, to high-quality customers,” a senior manager at a local bank said, asking not to be named.
“The model worked well before the financial crisis but it is now putting them in a trouble. The local household sector is still reeling from the financial turmoil due to the sluggish real estate market. SC First was particularly hard hit due to its heavy exposure to consumer lending,” he added.
He pointed out that given that the property market is expected to continue to stay in the doldrums for a while and that the retail market has reached saturation point, it is unlikely that they will soon find a way to turn around.
“Now household debts are emerging as one of the biggest hurdles to the economic recovery and the financial regulator is also voicing concerns about further extension of consumer loans. It will take quite a time for them to get back on track,” he added.
SC First’s recent decision to close down 27 unprofitable outlets is deemed related to the sluggish performance. Since its retail banking-focused model has proved ineffective, it is seemingly trying to develop a more efficient one.
“The shutdown of our 27 Korean branches is not a move to shift our business strategy here, but it is rather one of many options in consideration to diversify business channels and target our customers in a more effective way,” an executive at Standard Chartered told The Korea Times, on condition of anonymity.
“We are preparing a number of new innovative business approaches. The opening of a Gangnam branch equipped with digital merchandising system and the shutdown of the unprofitable branches are both in line with such a move,” he added.
Citibank has its own drawback. Citi opened its first branch in 1967 and launched Citibank Korea in 2004 by taking over KorAm Bank. However, Citibank, headed by CEO Ha Yung-ku, failed to come up with its differentiated strategy.
It has won market share here over the past decade by using Citi’s superior skills and knowhow in private banking and asset management but is now losing its competitive edge as Korean lenders have quickly caught up with it.
Setback in derivatives trading
Another key culprit behind their anemic growth was a sharp fall in profits from transactions related to foreign exchange products and derivatives, including interest rate arbitrage trading. Under the arbitrage transaction, a foreign bank branch borrows dollars from its headquarters, and then hedges the foreign exchange risk by selling a forward contract in the same foreign currency.
Simply speaking, foreign bank branches borrow dollars from their headquarters at cheaper costs and invest the money in Korea’s treasury bonds and foreign exchange stabilization bonds generating higher returns.
Since they hedge the foreign exchange risk, they are immune to currency risks. In other words, they can enjoy ``riskless profit’’ guaranteed by the onshore-offshore basis swap rate differential.
“Foreign banks used to enjoy huge gains from arbitrage trading but opportunities have disappeared due to global de-leveraging following the crisis and stable won-dollar rates,” Woori Investment & Securities credit analyst Louis Shin said.
“In addition, the government’s move to tighten rules on foreign banks’ borrowing from headquarters made it even harder to make profits from the transaction,” he added.
According to the Financial Supervisory Service, 53 branches of 37 foreign banks operating here posted a combined net profit of 1.5 trillion won in 2010, down 38.1 percent from 2.4 trillion won in 2009.
The fall was due to a plunge in profits in transactions related to foreign exchange products and derivatives. Societe Generale was among the worst performers with a net loss of 4.4 billion won, together with Singapore’s OCBC (800 million won) and Australia’s Macquarie (6.7 billion won). HSBC was the best performer with a net income of 293.5 billion won.
In the case of SC First, a language barrier was another big issue to address because English is preventing effective communication between Korean managers and foreign executives. According to bank employees, passion is sometimes lost during translation and the vacuum in communications creates fear and nervousness.
“Some Korean managers not fluent in English complain about their difficulties after having a meeting chaired by a foreign executive. It is getting better but there are still some managers who ask other participants about details of the meeting afterwards,” said an SC First junior manager on condition of anonymity.
“English is important but what is more important is how effectively they can communicate. In that regard, there is much room for improvement,” he said. Currently, there are around 40 foreign executives and senior managers working at SC First, including CEO Richard Hill.
No surprise
However, industry experts say that regardless of the aftermath of the global crisis, what’s happening here is natural, noting that it is not easy for even a global bank to become competitive in other markets.
“In retail banking, you will always see local players dominate. They are very strong in their own market, even if there is a global bank competing with them,” a senior consultant at a global consulting firm said, asking not to be named.
“It’s very specific casual services. Retail is a local business and then there will always be local players who will be very competitive. For example, in terms of retail banking, Citibank is strong in the U.S., and then they had something in Germany, Italy and Greece and a bit in Japan. Of course overall it’s quite large, but if you look at the local position, they were small and mostly non-competitive.”