Banking Competitiveness
The growth of Korean banks' global competitiveness has been marking time for several years. Many experts blamed it on the fact that the government has a poor understanding of the financial industry and approaches the financial industry as an industry to be regulated. In particular, banks are also criticized for their weak governance structures, including the term of office system for chairmen of banks, which force them to implement management to focus on short-term results not to mention mapping out a long-term plan, becoming a stumbling block to boosting global competitiveness.
The KB Financial Group (KBFG) ranked 60th in the results of Korea Ratings’s analysis of the financial conditions of the world’s top 100 banking groups selected by the international finance magazine Banker in 2016. It is said that although the KBFG jumped by four notches from 64th place a year ago, taking 60th place, is not something a bank is proud of. The Shinhan Financial Group, which has ranked first among Korean banks for a long time, ranked 68th after the KB Financial Group. The Hana Financial Group came in 80th and Woori Bank 88th. NH Nonghyup Bank did not make top 100 last year and this year. In addition, although the state-run Korea Development Bank (KDB) was listed in the top 100, the bank plummeted to 64th from 58th of last year due to the disposition of Daewoo Shipbuilding & Marine Engineering among others.
It is also pointed out that even if banks are evaluated based on profitability not on owner’s equity, global banks dwarf Korean banks. The five Korean banks in the top 100 recorded average ROA of 0.4% and average ROC of 7.1%. ROA is an indicator of profitability. In particular, in the case of ROA, the average of the top 100 banks was similar to that of the previous year but that of the Korean banking groups dropped by 0.2%p.
A drop in the profitability of the nation's five largest banks was largely attributable to restructurings of the shipbuilding and offshore sectors. But Kim Jung-hyun, a specialist at Korea Ratings, said ROA edged down except for the deterioration of earnings stemming from restructurings. "This shows that Korean banks are not making excessive profits via greedy interest rates," some experts say. But profits from gaps in lending and deposits account for 80% of bank's profits. It is pointed out that banks are still employing outdated management to depend too much on making profits from loans, making it difficult to make a big improvement in profitability.
In the past, there were some attempts to approach the financial industry from an industrial standpoint, but the current government has been unable to suggest a plan to properly foster the financial industry as the government has been busy concentrating on giving financial supports for ordinary people such as writing off household debts. "I can hardly stop thinking that the government regards the financial industry as merely a tool for supporting or protecting ordinary people or the weak," said Yoon Chang-hyun, professor of business administration at Seoul City University.
In some cases, weak governance structures within the banking sector are also pointed out as one of the causes of the deterioration of bank's long-term competitiveness. This means that struggles for power are repeated whenever terms of bank chairmen come to an end, making banks’ top management pay a lot of attention to short-term achievements only, not to long-term ones which do not affect reappointment. It is also said that some banks are weakening their own competitiveness by accepting their labor unions’ excessive welfare demands for the reappointment of their chairmen. As a result, there is a voice that it is necessary to provide bank CEOs with some environment to manage banks in a direction consistent with long-term strategies by extending the tenure of bank CEOs, which is an average of three years.