On the evening of July 5 this year, only one of the three International Finance Center (IFC) buildings in Yeouido, Seoul was lit. The IFC was built according to the Korean government’s ambitious plans to set up a global financial hub, yet the third building, containing 55 floors and which was completed in November last year, was left in darkness with no company housed in it. The second building’s occupancy rate still stands at just 38%, with most of the space in the building empty.
Furthermore, no major foreign financial companies befitting the name of IFC are to be found in any of the three buildings. “The international finance center in Hong Kong is extremely popular with global financial firms, as seen by the recent contract signed by Swiss bank UBS to extend their lease until 2019,” said a Seoul branch head of a foreign securities company who wished to remain anonymous, adding, “The IFC in Seoul, however, shows the current status of the financial industry of Korea, which is shunned by international investors.”
Foreign Financial Firms Rushing Out of Korea
Not only are foreign financial firms refraining from entering Korea, but also, what few companies are already here are now leaving. For instance, HSBC closed 10 of its 11 branches and shut down the personal finance business here on July 5 this year, becoming the eighth foreign bank to leave the country since 2001. Prior to this, the Asahi Bank, Bank of Hawaii, California Union Bank, National Australia Bank, and ArabBank have moved out of Korea. According to the Financial Supervisory Service (FSS), the number of foreign banks doing business in Korea decreased from 46 to 39 between 1999 and 2012.
This exodus is not limited to the banking industry. Dutch insurer ING is currently selling its Korean office to Tong Yang Securities, while UK company Aveva is expected to dispose of its shares in Woori Aveva Life Insurance. Meanwhile, Goldman Sachs Asset Management last year announced its intention to leave in five years, while AIG has canceled plans to set up its Asia-Pacific headquarters in Seoul.
The financial authorities are concerned that few foreign financial companies will participate in the privatization of Woori Financial Group, which is scheduled to start from the latter half of this year. “The competition is overheated here, while profitability is low and the government is choking the industry with excessive regulations,” said another anonymous source, continuing, “Therefore, who will step in to acquire a local bank?”
Slim Chance of Profitability in Domestic Banking Sector
The biggest reason for the decreasing attraction is the slim chance of profits caused by the market’s backwardness. Local banks are focusing on easy interest income, and thus becoming increasingly vulnerable as the interest rate drops. The government, on its part, has worsened the situation by focusing on the corporate social responsibility of banks since the recent global financial crisis. Korean banks’ total net profits had reached 15 trillion won in 2007, but the sum fell to 8.7 trillion won last year.
Their low profitability is even more highlighted when compared to those of foreign banks. In 2012, the average return on equity (ROE) of 17 Korean banks was no more than 6.41%, while that of the four major banks in China -- Industrial and Commercial Bank, China Construction Bank, Agricultural Bank of China and Bank of China -- was as high as 21%. The ROE of the four leading American banks -- Wells Fargo Bank of America, Citibank and JP Morgan Chase -- was 7.3% during the same period. “Global financial companies are streamlining themselves amid the recession and getting rid of less lucrative arms,” former FSS vice chairman Joo Jae-seong explained, continuing, “Under the circumstances, their Korean branches are taking a direct hit.”
Korea Institute of Finance researcher Seo Byeong-ho echoed this, saying, “The structure of the local financial industry is very dull and monotonous and the companies in it are showing no uniqueness.” He went on, “Since their profits tend to be fluctuated by temporary causes such as economic cycles, foreign investors consider the Korean financial market to be less predictable but much riskier.”
Korean Financial Industry Restructuring Needed
For decades, banks and financial institutions in Korea have increased their assets at a rapid pace, thanks to the skyrocketing demand from the private and corporate sectors amid fast economic growth. The peo ple have rushed to put their money in houses and buildings, believing in the myth that real estate prices never fall. The financial industry has also provided more and more real estate loans as their number one cash cow. Specifically, the assets in the industry soared from 890 trillion won (US$827 billion) to 2.953 quadrillion won (US$2.746 trillion) between 1998 and 2012.
However, this type of growth is losing steam nowadays. With the bubble burst in the property market, household debt amounting to 1.000 quadrillion won (US$930 billion) is sending a serious warning signal. The trend of low growth is also deterring companies from making investments to slow down the growth of corporate financing. The Korean economy has remained below the potential growth rate for nine consecutive years since 2011. Consumers have tightened their purse strings due to massive debt, and an increasing number of economists are concerned over the very same deflation as seen in the Lost Two Decades of Japan.
The Korean government’s economic growth rate forecast for this year is 2.6%, which is the fifth lowest since the 1970s. The thing is, the current stagnation has much to do with the aging population and decrease in the number of working-age citizens, whereas the past cases were derived from external shocks such as the Asian Financial Crisis in 1997, when the national economy recorded negative growth of 5.7%, the Second Oil Shock in 1980 (-1.9%), and the global financial crisis five years ago (-0.3%). Thus the recoveries could be made in relatively short periods of time.
Business Paradigms Should Be Shifted
Loan-making cannot be a way for banks to survive such an era. Since the size of the national economy is limited, the demand for loans is unlikely to increase. The deposit market is going through drastic changes, too. In low interest rate times, people go for highreturn products while trying even more to shun high-risk ones.
“Consumers will show an increasing demand for more types of financial products that can boost their assets effectively,” said Kim Dong-seong, director at the Supervision and Coordination Department of the Finan cial Supervisory Service, adding, “In response, banks and financial institutions need to expand their high-quality asset management services, and it is investment in human resources that holds the key to it.” Senior research analyst Koo Bon-seong at the Korea Institute of Finance echoed by saying, “At this critical juncture, banks have to convert many of their service models into financial consulting services.” He explained, “To this end, they need to make more R&D investments in order to nurture experts in the fields of asset management, overseas market penetration and industrial development.”
A private banking manager at a commercial bank added, “It is absolutely sure that the asset management market will continue its growth down the road but, at the same time, it is also true that local banks are experiencing a shortage of human resources capable of financial consulting and providing information on domestic and foreign investment products.”