Banks need less gov’t oversight, more expansion
Last year, the net profit of the 11 financial holding companies in Korea was 2.35 trillion won ($2.16 billion). That’s a sharp drop from the 6.6 trillion won recorded in 2012.
After enduring the worst financial crisis since the late 1990s, the government and financial industry vowed to expand aggressively to make Korea a global leader in finance. And each administration sworn into office since 2008 has kept its eye on that same goal.
But in recent years, the target has seemed to drift farther away, especially since Korean banks’ revenue collected from their overseas businesses now accounts for less than 5 percent.
Shinhan Bank’s overseas revenue only accounted for 6.5 percent of its earnings in the first quarter of this year, and that was the highest ratio among Korean banks. Woori Bank’s overseas revenue accounted for 4.1 percent of its total and KB Kookmin Bank’s earnings from abroad made up 2 percent.
Overseas assets to total assets at Korean banks as of the end of June only accounted for 4.3 percent.
“Among Korean industries, the only one that has failed to globalize is banking,” said Jun Kwang-woo, a Yonsei University professor.
But why did it fail?
Outside Korea, low interest rates have prevented domestic banks from expanding aggressively.
Banks make money by creating funds collected from customers at a low interest rate, then lend to companies and households at higher interest rates. However, the low-interest loan trend in the global market has narrowed the difference between deposit interest and loan interest.
In Korea, the net interest margin, which is an indicator of banks’ profitability, recently dropped to the 1 percent range from about 3 percent a few years ago.
The major problem that Korean banks face is that 90 percent of their revenue comes from interest difference and they have no other alternative source of earnings.
The expanding mobile revolution also contributed to shaking the sales foundation of Korean banks. As profits shrank, banks were busy cutting human resource costs and competitively adopting automated services like ATMs.
But the investments that banks made in ATMs has already become a huge financial burden since online and mobile banking with smartphones and other devices is spreading at an alarming rate.
In an effort to cut costs, banks have started to reduce the number of branches. At the end of July, there were 5,101 bank branches in the country, 268 fewer than in July last year.
The recent downsizing reminds many of the time when banks were shutting down during the 2008 financial crisis.
Although it saved money, closing branches came with a cost. Banks were stuck in a vicious cycle where their revenue made from sources other than deposits and loan interest difference, such as funds and insurance sales, were also shrinking.
While their earnings diminished, the banks were rotting internally as well, with continuous conflicts among members of management and with labor unions.
KB Kookmin Bank was always considered a leading bank. But parachute appointments into top openings and the feud this year between its holding company’s chairman and the bank president tarnished its reputation.
The situation at Woori Bank, which is heavily influenced by the government, is similar. Shinhan Bank took advantage of their infighting and emerged as the top bank. But it is still haunted by the ghost of the infamous 2010 feud between its holding company’s chairman and president.
Hana Financial Group is hoping to become a financial leader after it acquired Korea Exchange Bank. But it is still struggling to deal with opposition from KEB’s labor union.
Experts say the government’s influence over financial institutions and outdated regulations are holding back the banking industry.
“The Korean financial industry lost its ability to propagate because it has submitted to the government’s influence,” said Lee Sang-bin, a finance and business management professor at Hanyang University.
In any country, strict regulations on banking are inevitable because of the obligation to protect clients’ money. However, rules are tighter in Korea - any product or service that a bank wants to implement must be approved by the financial authorities.
“Even if a bank comes up with an amazing idea, it gets scrapped every time because of the financial authorities’ regulations,” said an executive at a Korean bank who requested anonymity.
“There are just too many regulations and because the officials in charge at the financial authorities change frequently, it is hard to have a solid hand on the direction of oversight,” said another bank executive.
And while other advanced economies have a single regularity body, financial regulations in Korea are split between the Financial Services Commission and the Financial Supervisory Service, which adds to the confusion.
Bank officials say that eventually they give up on trying to come up with new products and services because it takes too much time to get authorities’ approval and they must lobby hard to convince them.
“In the end, the general consensus is just do what we are told [by the government],” one bank official said.
But a bigger problem is the regulatory pressure from authorities that are not inked in laws.
Among the 3,100 financial regulations that the FSC can enforce, only 1,100 are stipulated by law.
Due to heavy government influence, a single call from a financial watchdog can lead to more restricted activities of a bank’s management.
“As parachute appointments and government influence continued, the banking industry became self-regulated, and as a result instead of focusing on building their ability to create profit and manage risks, focus has been put on collecting a big paycheck,” said Oh Jung-gun, chairman of the Asian Financial Society.
The paycheck that Korean banks’ top management takes home is three times larger than their counterparts at Japanese banks, although the net profit of Korean banks is much smaller.
And wages are also high for regular employees. Although their productivity per capita has fallen to one-third of what it used to be due to lower profits, the average annual salary of a banker exceeds 100 million won.
Experts say that if Korea’s banking industry continues down this course, the future will be bleak. They say it is important for executives and labor unions to realize the crisis they are facing.
The financial situation is being further destabilized by the recent mix of monetary policies being taken up among advanced economies.
Though the United States has ended its quantitative easing, Japan and Europe are expanding theirs.
Domestic financial institutions are waiting for a major shift that is expected to come now that the merger of Hana Financial Group and KEB and the sale of Woori Bank are making progress.
In order for Korean banks to survive, experts say there must be bold structural reforms including eased regulations and international expansion.
Some say the main reason behind mishaps such as loan fraud is a lack of expertise among financial executives. The fact that companies like Moneual or KT ENS could borrow huge amounts of loans using fabricated documents exposes that weakness.
“[Those loans] were possible because banks were wasting time instead of focusing on stepping up their expertise,” said Oh of the Asian Financial Society. “There is a need in raising financial experts and step up the overall ability.”
Former Finance Minister Kang Bong-gyun said the economy is having trouble gaining momentum mostly because money is not flowing from the financial sector to the areas that really need it. “There should be a major structural reform that starts from the financial industry,” the former minister said.
Scholars like Jun, the Yonsei University professor, said a major overhaul of regulations like the one that the British government went through in the 1980s should be carried out in Korea.
“Unless all of the government’s involvement that has been practiced for so long is thrown away, the banks will miss the opportunity to secure autonomy and creativity,” Jun said. “The banking business has to be completely rebooted in order to move forward.”
But Lee of Hanyang University said that if banks were allowed to help decide which regulations need to be lifted, they would lobby to eliminate each and every one. He said that as long as the institutions stay within their legal boundaries, they should be left to do what they want.
FSC Chairman Shin Je-yoon recently said the government will start evaluating banks’ innovativeness next year to ensure that they participate in the creative economy.
That plan has been met with skepticism because no framework has been set to encourage innovation at financial institutions.
Shin Yong-sang, a researcher at the Korea Institute of Finance, urged banks to expand abroad like Samsung Electronics and Hyundai Motor.
“The era when banks can share the local market among themselves has come to an end,” he said, adding that banks should focus on a long-term global strategy.
Experts agree that the local market is already saturated and unless the two Koreas are reunified or foreigners relocate en masse, it will not likely grow.
“There was a time when there were hopes that local banks could become global players like Samsung Electronics if they worked hard,” said Yun Chang-hyun, head of the Korea Institute of Finance. “But watching the feud at KB Financial Group, I’ve become doubtful.”
Kim Dong-won, an economics professor at Korea University and a former high-ranking FSS official, said that the oversight system also needs an overhaul.
“The Korean government is encouraging banks to expand their financial support to start-ups,” Kim said. “But even in the U.S. no retail banks specializes in that field.” He said the financial authorities must not regulate banks with the goal of satisfying the central government and its policies.
BY KIM DONG-HO [firstname.lastname@example.org]
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