The coming bank crisis

Another Pandora’s Box has landed on the desk of President Park Geun-hye. The box is labeled “Bank crisis.” She better keep the lid tightly closed, but the box is rattling and rocking and looks ready to blow. If it does, it will bring disaster to the already weakened local economy. It could be a prelude to a long, persistent economic rut similar to what Japan has been through for the past two decades.

The alarms bells first started sounding a while ago. Choi Beom-su, former vice president of Shinhan Financial Group, predicted that local banks would be barely surviving on a lifeline under current conditions and warned of a crisis on the horizon. Ha Yung-ku, Citibank Korea chief executive, said in an interview a month ago the situation in the market wasn’t even this bad during the global financial crisis, and stated his concern that the Korean banking sector was entering uncharted waters. Former Financial Supervisory Service Governor Kim Jong-chang, who served in the Lee Myung-bak government, also saw the making of a dire situation that the country has never experienced before.

The symptoms are already showing. Banks are losing profit levels fast. The combined net profit of banks last year fell nearly 30 percent to 8.7 trillion won ($7.79 billion) from 2011. The plunge will be bigger this year, with net profits possibly halving from last year. Banks reported net profits of 1.7 trillion won in the first half, nearly half of the 3.3 trillion won from the same period a year ago. The second half will likely be no better.

Banks are seeing sharp decreases in profits for the second consecutive year, a track record witnessed only during the Asian Economic Crisis of the late 1990s and the global financial crisis that followed 2008. Banks only maintained profitability because some of them sold off some assets. When excluding extraordinary gains, some banks may be running losses. Worse, the outlook for the coming years are not very good either. A senior government financial official expects the rut to go on for some time. The combined net profits of banks could be reduced to one-sixth the scale of last year in five years time.

Someone may ask what’s the big deal about banks becoming less profitable, especially since banks are generally not the favorite institutions of the average man on the street. Bankers are demonized as greed mongers who offer to lend umbrellas on sunny days and take them back when it starts raining. But like it or not, the financial sector is the heart of an economy. If a blood vessel gets blocked, the economy can feel serious repercussions. That is why the government spent billions of won to bail out banks during the so-called “IMF crisis” of the late 1990s. The United States did the same after 2008. Despite severe criticism, Washington offered big bailouts to save banks following the Lehman Brothers meltdown. The financial sector is also a highly value-added services sector that can offer good, secure jobs. Banks are too valuable to our society to let them fail no matter what you think of the fat cats who run them.

But now the banks face a crisis. They could take preemptive moves. They could expand their revenue bases, reduce costs or increase their sales networks. To increase revenues, they might have to charge more service fees. That may not be easy. FSS chief Choi Soo-hyun (pictured above) got himself into hot water after he recently indicated banks should be allowed to raise service charges to help increase their profits. Politicians strongly opposed banks digging into the pockets of working-class consumers while bank executives live on fat annual paychecks of over 100 million won.

Cost-saving endeavors are also not easy. Taking an axe to the paychecks of the executives is not that hard. But that won’t make a great difference. Instead, banks would have to reduce branches, lay off employees and cut salaries. This, obviously, is a nightmarish job as the unions won’t agree. The leaderships of financial holding groups are already challenged enough with revolving-door practices and government interference. Organizations are dysfunctional. Strong leadership to usher in stringent restructuring cannot be reasonably expected.

Boosting sales networks is no less hard. HSBC closed all its retail branches in Korea, suggesting an already saturated retail market. There is little room for banks to increase revenue at home with household loans already at alarming levels and amid rising corporate insolvencies. They have to look overseas. But Korean banks tried going international a decade ago and made little progress.

The industry and government can either sit back and watch the ground crumble or aggressively seek solutions for stability and growth. They must choose the latter. But they must be resolute to overcome resistance from labor unions, politicians and consumers. There is little time. Pandora’s Box could burst open at any moment.

*The author is an editorial writer of the JoongAng Ilbo.

by Kim Young-ook