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Banks don’t make much overseas

Unlike foreign firms, leading income source is still interest on loans
Aug 25,2018

In the first half, Korean banks saw their net profit reach all-time records, while major Korean companies like Hyundai Motor reported disappointing performances.

The banks continued to rely heavily on the domestic market, as their profits from overseas business have slowed.

The need for Korean banks to diversify their income sources has often been cited, as most of the banks’ earnings come from the difference between loan interest and deposit interest.

Korean banks are also accused of manipulating their customers for profit by playing on the uncertainty over future monetary policy changes.

The four leading commercial banks - Shinhan, KB Kookmin, KEB Hana and Woori - reported a net profit of 5.14 trillion won ($4.58 billion) for the first six months of this year.

During the same period, the net profit that the banks made overseas stood at 533.2 billion won, or 10.4 percent of the total net profits made during the first half of the year. Although this is a 9.9 percent increase compared to the end of last year, it was far lower than the double-digit growth enjoyed in the previous two years.

In 2016, net profit made from overseas business grew 12.2 percent, and in 2015 it increased by 12.4 percent.

This is a contrast to major global banks, whose net profits are mostly made in overseas markets.

In the first half of this year, Standard Chartered’s net profit from overseas markets accounted for 94 percent of its total, while those made in the United Kingdom, where its headquarters is located, only accounted for 6 percent of the total. The majority of its net profit came from Hong Kong, which accounted for 49 percent of the total. Profits made from Korea took up a full 7 percent.

The situation is similar for Banco Santander, whose overseas net profit last year was 85 percent of the total, while only 15 percent came from Spain, where its headquarters is located. U.S.-based Citibank made 51 percent of its profits overseas.

Although it is difficult to make simple comparisons with global banks, considering various factors including their long history and massive market exposure in other foreign markets, Korean banks have long made their profits by charging higher interest rates on loans.

According to the Financial Supervisory Service, as of the first quarter, the net profit made by the difference between loan interest and deposit interest accounted for 78.2 percent of the total net profit that the four leading banks made. That’s up from the 73.3 percent reported at the end of last year.

Other domestic profit-making schemes, such as commission charges, barely made up 20 percent of the profits.

But the all-time record profits are not viewed favorably, as many see them as the result of banks manipulating the current mood in the market to raise the interest rates on loans, increasing the burden for small and mid-size businesses.

The Bank of Korea has kept the key interest rate at 1.5 percent for eight consecutive months, but it is facing intense pressure to tighten up the monetary policy rate.

The last time the Korean central bank raised the interest rate was Nov. 30 last year, when it bumped up the rate by 0.25 percentage points. This was the first increase in nearly six and a half years.

However, this year, major advanced economies have been raising their key interest rates, led by the U.S. Federal Reserve. The U.S. policy rate is already between 1.75 and 2 percent.

There has been concern that, if the difference between U.S. interest rates and Korea’s widens further, it could spark a massive exodus of foreign investors from the local stock market.

Korean banks widened the interest difference between loans and deposits by 0.07 percentage points compared to a year ago. The average difference is currently 2.08 percentage points.

While many companies are struggling with restructuring, those in the banking industry are enjoying hefty bonuses and benefits thanks to record-breaking profits.

“If the banks continue to rely only on the domestic market, they could easily be affected when unfavorable factors like a stagnant economy or changes to the key interest rates occur,” said Lee Taiki, the head of the bank and insurance research at the Korea Institute of Finance.

“The banks need to raise their profits from commission charges by developing asset management or consulting services or searching for new opportunities with the accumulated knowledge that they have built in overseas markets.”

Others say the government needs to relax the law so that the banks could diversify their income sources.

“There are a lot of regulations against sales methods or product development against business methods that aren’t based on the interest difference,” said Sung Tae-yoon, a professor of economics at Yonsei University. “Financial authorities need to refrain from excessive regulations.”

Shin Min-soo, a professor of business administration at Hanyang University, said the government needs to change current laws, which are focused on protecting the banking industry, to increase competition.

“Because of the law, there’s no competition and only stable businesses are left,” said Shin. “The government needs to encourage fintech companies to advance in financial markets using diverse business models.”

BY JEONG YONG-HWAN AND LEE HO-JEONG [lee.hojeong@joongang.co.kr]