Tough regulations force banks to go abroad

Concerns remain over reliance on Southeast Asian market

By Park Jae-hyuk

Korea's banking groups are expected to further accelerate ongoing efforts to shift their focus overseas from the domestic market, as multiple financial regulations proposed ahead of the presidential election next year are set to deteriorate their earnings here.

They are planning to offset worsening profits in Korea by seeking inroads into Southeast Asian countries with higher growth potential.

However, concerns still linger about their increasing reliance on such emerging markets.

Data compiled by the Financial Supervisory Service (FSS) showed that Korea's commercial banks cut their number of branches here to 3,546 in 2020 from 3,784 a year earlier, 3,834 in 2018 and 3,861 in 2017.

The exact number of their outlets outside the country remains unclear, because the FSS statistics do not include their "sub-branches" overseas, while banks count them when collating data on their "global networks."

According to data from KB, Shinhan, Hana and Woori banks, the combined number in their "global networks" jumped to 1,440 in 2020 from 844 in 2019, 797 in 2018 and 630 in 2017, due to their aggressive M&As and winning of licenses in other countries.

Separate data also showed that the top four Korean banks increased the number of their employees overseas to 17,914 in the first quarter of 2021 from 14,620 in the fourth quarter of 2018, while cutting the number of employees here to 57,662 from 60,684 during the same period.

"Overseas expansion is being pursued by banks as the domestic market's profitability has reached its limit," an industry insider said on condition of anonymity. "Regulations in favor of fintech firms have also prompted conventional banks to seek opportunities abroad."

Financial Services Commission (FSC) Chairman Koh Seung-beom, second from right, speaks during his meeting with CEOs of the nation's top five banking groups ― KB, Shinhan, Hana, Woori and NongHyup ― at the Korea Federation of Banks headquarters in Seoul, Sept. 10. Courtesy of FSC

Worsening domestic environment

Korean banks have recently begun to see a bigger risk in the deterioration in their profits, due to various financial regulations, that some people are calling "populistic."

They are facing difficulties in lending money, following the tightening of government regulations intended to curb snowballing household debt and soaring housing prices.

Despite questions from both lenders and borrowers about the effectiveness of such policies, the financial authorities have maintained a hardline stance on the measures.

Another unfavorable factor for banking groups is the government's attempts to prevent their M&As in order to force them to secure capital to provide financial support for people suffering difficulties caused by the COVID-19 pandemic.

The financial regulators have advised financial firms to refrain from signing large-size deals or increasing dividends, since the outbreak of the pandemic.

Some lawmakers are even trying to force banks to write off the debts of borrowers, whose income has dropped significantly due to the government's restrictions on store openings amid the coronavirus pandemic.

A controversial revision to the Banking Act, proposed by Rep. Min Hyung-bae of the ruling Democratic Party of Korea, is widely seen as part of the ruling party's efforts to gain popularity among voters ahead of the presidential election next year.

Seen above is the main branch of Bank Bukopin in Jakarta. Courtesy of KB Kookmin Bank

Lucrative foreign markets

In contrast, foreign financial authorities are tending to ease their regulations to attract more global financial companies.

Indonesia temporarily lifted the ban on foreign financial firms from holding more than a 40 percent stake in a local financial company, when KB Kookmin Bank increased its stake in Bank Bukopin last year.

Korean banking groups also began to again post satisfactory earnings from overseas this year, after a temporary fall caused by the pandemic in 2020.

Hana Financial Group, the first Korean banking group to win a banking license in Taiwan, saw its first-quarter overseas net profit rise to 336.7 billion won ($288 million) from 315.9 billion won a year earlier.

Shinhan Financial Group, the parent of Shinhan Bank having the leading status among foreign banks in Vietnam, posted 196.5 billion won in its net income abroad during the first quarter, up from 152.7 billion won a year earlier.

KB Financial Group's overseas earnings rose to 68.9 billion won from 49.9 billion won during the same period, thanks to KB Kookmin Bank's acquisition of PRASAC Microfinance Institution in Cambodia and Bank Bukopin in Indonesia.

Woori Financial Group, which plans to further expand its presence in Vietnam, Cambodia, China and the U.S., enjoyed earnings growth of 24.3 billion won to 116 billion won.

"We will seek to expand further in Southeast Asia because it has higher net interest margins," a representative from one of the banking groups said.

Post-pandemic strategies

The financial groups said the coronavirus has not changed their long-term strategies, although the pandemic temporarily affected their short-term earnings.

They are set to focus more on the Southeast Asian countries as planned, as well as entering developed markets, such as London and Singapore, to improve their competitiveness in investment banking.

Credit rating agencies, however, have warned of potential risks from their growing exposure to developing nations.

"Considering Southeast Asia's insufficient financial management systems and volatilities, banks can rapidly become insolvent," Korea Investors Service analyst Kim Jung-hoon said in report. "Just like Korea, Southeast Asia is categorized as an emerging market, so banks may not be able to diversify their risks effectively, and there also exists geopolitical risks, such as the military coup in Myanmar, which cannot be controlled by individual financial firms."

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