Financial sector hitting the skids

Korea’s financial industry - banks, brokerages and insurance companies - is having a terrible year with both revenues and profits only going in one direction: down. And now, all of them are cutting staff, salaries and perks across the board.

The nation’s three largest insurers - Samsung, Kyobo and Hanwha - announced their biggest layoffs in nearly a decade while the brokerage industry, which has been suffering from falling profits due to shrinking stock transactions, continues to cut back its work force.

Recent data by the Korea Exchange showed that the total volume of stock transactions in the first six months of this year was the smallest in eight years. A total of 666.8 trillion won ($658 billion) worth of stocks were traded, down 12.5 percent from the previous year.

According to the Financial Supervisor Service (FSS), the number of people working in local brokerage firms in the first quarter amounted to 39,146, which is a 7.5 percent drop from a year earlier. This is the first time that the number of employees at brokerage houses has fallen below 40,000 since the second quarter of 2008.

The same kind of layoffs are now spreading to the banking industry. Citibank Korea retired 650 employees earlier this year, and other banks are planning similar moves.

The industry estimates that a minimum of 5,000 employees will be laid off between 2013 and 2015. This would be the biggest layoffs since the 1997 Asian financial crisis, known in Korea as the IMF crisis.

All of the layoffs are stemming from falling profitability.

This is the first time since the third quarter of 2009 that the bank’s net interest margin on deposits and loans has fallen to the 1 percent range.

Brokerage firms, which suffered losses in the last three months of 2013, were able to barely get into the black in the first quarter. However, transactions are down. Buying and selling into funds, for example, amounted to 140 trillion won of transactions in 2008. That has fallen sharply to 80 trillion won last year.

Insurers, which have been trying to expand by offering high-interest savings insurance, is suffering from a low interest rate regime.

“Tax collected from the financial industry in 2012 amounted to 11 trillion,” said a National Tax Service (NTS) official. “This year it is expected to amount to 4 trillion won.”

The dire situation of the local financial industry owes a lot to its business strategies. The banks have long been overly focused on mortgage loans. As real estate prices have been stuck in the doldrums and the central bank has been keeping a loose monetary policy that has kept interest rates low, banks’ profitability inevitably fell. Because Korea’s banks lack the competitiveness of global banks, they have been afraid to expand overseas.

The situation isn’t much different for brokerage firms, which rely heavily on stock transaction commissions, which still account for more than 50 percent of the industry’s revenues.

On top of shrinking revenue and profits, the financial industry is starting to question its holding company system, which in many cases leads to top brass being parachuted down from government connections.

Analysts say the financial industry is the heart of a nation’s economy and for Korea’s economy to gain vitality, money has to circulate, which starts with the financial industry.

“Behind the lost two decades of Japan was the financial industry’s outdated ways, which avoided taking risks,” said Choi Beom-su, Korea Credit Bureau president.

BY JUNG KYUNG-MIN [ojlee82@joongang.co.kr]