Korean banks losing clout abroad amid pandemic

Lenders asked to focus on digitalization to brace for 'new normal'

By Anna J. Park

With the world economy facing a time of extended uncertainty from the COVID-19 pandemic as well as zero-range interest rates around the world, Korean banks are struggling to strengthen their competitiveness and improve profitability.

Of course, this is not easy, considering the banks' lowered net interest margins and a slowdown in lending among other factors. And the numbers show that local banks are not faring particularly well, compared to their global competitors.

According to the Banker's annual list of “Top 1,000 World Banks” announced earlier this month, most of Korea's major banks saw their rankings drop slightly from the previous year.

In terms of the size of Tier 1 Capital ― the core capital a bank holds ― KB Financial Group was ranked 61st, the highest among the Korean banks on the list, yet falling two places from 2019.

Shinhan Financial Group took 65th place, also two places lower, while the Korea Development Bank (KDB) was 67th, down three places from last year. Hana Financial Group, Woori Financial Group, the Industrial Bank of Korea (IBK) and NongHyup Financial Group followed at 81st, 91st, 96th, and 100th, respectively.

Except NongHyup Financial Group, which saw its ranking climb one spot, the six other Korean banks in the list saw their rankings drop or remain unchanged from the previous year. Specifically, the seven major domestic banks lag behind other global lenders in terms of the growth rate of their core capital.

Seo Dae-hoon, a researcher at the KDB Future Strategy Research Institute, said in a recent report that the average growth rate of the Tier 1 Capital of the Korean banks on the list stood at 2.3 percent, much lower than the 6.1 percent of the other banks on the list. The average return on total assets also dropped by 0.08 percentage points from 2019.

“In order for banks to secure stable and consistent funding, they inevitably need to raise their capacity for loss by expanding their capital,” the researcher said. “The changed global environment from COVID-19 has made the banks actively seek new business models to generate additional profits.”

As the researcher pointed out, Korean banks are in dire need of raising their capital by improving their profitability. In an effort to do that, the major financial groups have been focusing hard on two key goals: full-on digitization and further advancement into overseas markets. Market watchers say while their goal directions are correct and appropriate, their efforts are still insufficient.

Digitization

Even before the pandemic began sweeping the world, Korea's major financial groups had chosen digitization and AI-based data analysis as key strategies to improving profitability. COVID-19 has accelerated their move towards digitized business operations.

Major bank heads here have come up with various measures to achieve this goal, ranging from creating special taskforces to closely cooperating with fintech startups as a means to find innovative ways to grow. But there's room to do much more, according to analysts.

"The financial scene worldwide is swiftly changing to where most banking is being conducted in a contactless, ICT-based technology environment. Yet Korean banks' investment in the area seems still lacking, compared to global banks,” Lee Hyo-seob, a senior research fellow at the Korea Capital Market Institute, told The Korea Times.

For instance, only about 5 percent of new staff recruitment by the banks are for their ICT technology departments. Also investment in specific fields, such as a tech infrastructure or launching new ICT-based projects, are falling short of the level of that made by their global competitors.

“Tech-fin firms like Kakao or Naver are attempting to enter the financial market, yet traditional power houses have failed at providing innovative services,” the research fellow said, emphasizing that global banks are aggressively exploring ICT-based services through M&A activities involving startups.

The analyst also pointed out some of the country's regulatory systems, such as the strict separation of industrial and financial capital, hamper local financial companies from making further investment into fields where it is most required. Despite such limits, the analyst called for bank leaders to think, with innovation in mind, from a global perspective.

“About 40 percent of the world's total population live in Southeast Asian countries. The population there is young, and their demand for contactless financial services is increasing,” the researcher said, emphasizing that Korean banks' innovative digitization in overseas markets is a must.

Expansion overseas

As Korea's economic growth rate falters, its banks have been strengthening their international presence, notably in Southeast Asian countries, over the years to earn larger profits.

As of March this year, 13 Korean banks ― commercial and state-run ― are operating 1,043 branches, offices or local corporate entities in 42 countries. More than 70 percent of these are located in nine Southeast Asian countries, including Vietnam, the Philippines, Indonesia, Cambodia and Thailand.

Profits from overseas have continued to increase. To date, about 5.9 percent of the four major financial groups' annual profits come from their overseas enterprises. As of the second quarter of 2018, Hana Financial Group earned 1.98 trillion won ($1.65 billion) in profits overseas, followed by Shinhan with 989 billion won, Woori at 655 billion won, and KB, 181 billion won.

Market analysts point out that Korean banks' general enhanced credit ratings have increased their global competitiveness. Yet they advised a more strategic approach in managing entities in overseas markets.

“As Korea's major domestic banks have historically developed through their focus on retail banking, it seems they are also trying to focus on retail banking overseas,” Suh Byung-ho, a director at the ASEAN Financial Research Center of the Korea Institute of Finance, told The Korea Times.

“In terms of retail banking, it's important to gain a critical mass in one specific market. This requires financial groups to exert very focused and sophisticated strategies in one or two countries to achieve success. Instead, Korean banks are attempting to win in retail banking markets in various countries, which shows a lack of focus,” Suh said.

The analyst added now that Korean financial groups' credit ratings have been raised, they need to strengthen their wholesale banking overseas, which lags behind their global competitors.

Lastly, market experts point out that shares of Korean banks are exceptionally low priced, which is almost bizarre given their generally sound financial assets. In a vicious circle, this situation in turn affects their low capital status. This has been one of the reasons why Korean banks hold a weaker level of Tier 1 Capital compared to other major global banks.

“Korea's bank stocks are very low priced, and they are unpopular among domestic investors. This makes it hard for local banks to increase their capital through equity, and this keeps their Tier 1 Capital rate low,” noted Suh, saying an improved investment environment would benefit Korean banks by enabling them to raise more capital.