Banks struggle with falling profitability abroad amid toughened regulations

Korea's commercial banks are struggling with declining profitability abroad, due mainly to the toughened business environment in Southeast Asia, where they have been rushing to expand their presence.

The lackluster overseas performances have resulted in a greater reliance on domestic earnings, mainly interest income that has been disputed as a "windfall profit."

The country's four largest lenders — KB Kookmin, Shinhan, Hana and Woori — reported a combined net profit of 337.9 billion won ($253.07 million) from overseas in the first half of 2024.

The amount represents a 38.1 percent decline from 545.6 billion won in the first half of 2023.

"Such a disappointing performance is linked closely to business in Southeast Asia," a public relations official at one of the banks said on condition of anonymity.

The official explained that the central banks in the region have been hiking their benchmark interest rates, which made Korean lenders raise capital at a higher cost.

For instance, the key interest rate in Indonesia went up from 5.75 percent in January 2023 to 6.25 percent in April.

In return, Woori Bank's corporate branch in Indonesia posted a 10.5 percent year-on-year decline in net profit for the first six months of this year.

The branch accounts for more than half of Woori Bank's overseas earnings.

KB Kookmin's Indonesian branch reported a 151.5 billion won net loss in the first half after posting a 261.2 billion won net loss for the entirety of 2023.

Also speaking on condition of anonymity, an employee of a major bank said Korean lenders are increasingly setting aside loan loss reserves against economic uncertainties that countries they operate in face.

Also known as bad debt reserves, loan loss reserves are estimated amounts of accounts receivable that are at risk of going unpaid by customers.

"Loan loss reserves are a minus factor in terms of earnings, and it will be crucial for the companies to minimize such reserves to raise profits," he said.

He pointed out that regulations in some countries hinder overseas growth.

"The regulations delay business expansion plans, while the companies have to cope with costs for maintaining operations there," he said.

Under the circumstances, overseas profits accounted for only 4.8 percent of the four lenders' total earnings in the first half.

Market observers viewed banks' underperformances inevitably make them reply on domestic earnings.

These earnings consist mainly of interest income, which has been criticized as a windfall profit as lenders make no sweat to raise profit at a time of a high benchmark interest rate.

Another financial industry source said, "The banks should keep in mind that their sluggish business overseas can additionally deepen the dispute on windfall profits."