Government debt curbs squeeze foreign banks

Standard Chartered and Citigroup have seen their $6 billion bet on Korea turn sour in less than 10 years as the two banks struggle to sustain profits in an economy plagued by rising household debt.

Standard Chartered took a $1 billion writedown on the value of its business in the country in August, a cost that’s set to end the London-based lender’s 11-year streak of record annual profits. At Citigroup, Korea will hurt revenue in Asia through 2014, Chief Financial Officer John Gerspach has said.

Korean lenders have seen their return on equity, a measure of profitability, shrink by more than half over the past decade when Standard Chartered and Citigroup first pledged the largest-ever foreign investment in the country’s financial industry. With the government stepping up efforts to curb household debt, foreign banks have been left seeking ways to cut costs.

“Banks will have to accept the new normal of low growth, low return on equity,” said Yoo Sang Ho, a Seoul-based banking analyst at HI Investment and Securities. “They have to forget what they saw in the mid-2000s.”

Standard Chartered, Citigroup and HSBC Holdings first started competing for Korean banks after the economy and banking system rebounded from the 1990s Asian currency crisis that led to an International Monetary Fund bailout. In 2004, New York-based Citigroup trumped Standard Chartered to buy Koram Bank for about $2.7 billion. The following year, Standard Chartered beat HSBC in acquiring Korea First Bank for $3.3 billion.

Over the past five years, Korean economic growth slowed to 2.9 percent from an average 5.8 percent in the nine years through 2008, according to the IMF, as household debt swelled. At the same time, commercial banks saw their ROE slump to about 7.4 percent last year from 20.3 percent in 2005, according to data from the nation’s Financial Supervisory Service.

Bank lending rose 3.4 percent in 2012, the weakest since a drop of 0.1 percent in 1998 amid the Asian currency crisis, according to Bank of Korea data. Loan growth averaged 6.5 percent in the five years starting in 2008 after averaging about 17 percent for nine years, the data show.

“Rules that limit household lending must have hammered profits at foreign banks that rely more on retail business than their domestic peers,” said Kim Hye Mi, a researcher at Seoul-based Hana Institute of Finance.

Profits of all 18 lenders in the country - including Standard Chartered and Citigroup - fell 42 percent to 4.8 trillion won ($4 billion) in the nine months through September as lending slumped and margins on loans shrank to a four-year low, the FSS said.

Government measures have hit foreign banks harder than their Korean counterparts because they rely more on lending to individuals. Loans to households accounted for about 71 percent of lending at Standard Chartered Bank Korea as of September and 61 percent at Citibank Korea, according to FSS data. That’s compared with 55 percent at Kookmin Bank, the nation’s biggest lender by assets, and 45 percent at Woori Bank, the second largest.

“Because of the government’s view, on the retail side you have to conduct your business in a way that’s good for clients that isn’t necessarily profit maximizing,” said Iain Clacher, an associate professor in accounting and finance at Leeds University Business School, who’s published research on economic development since the 1950-53 Korean War. “It’s not a glamorous thing, but it can be stable.”

Bloomberg