Foreign Banks’ Escape Expected to Continue
Although the South Korean government has an ambitious plan to make the nation an international financial hub, another foreign bank is closing down its business in Korea this year. Starting with the shutdown of Goldman Sachs’ branch in 2017, Royal Bank of Scotland (RBS), Banco Bilbao Vizcaya Argentaria (BBVA), Barclays and UBS withdrew business from the domestic market. Accordingly, there is growing concern that more foreign banks will make an exodus.
The Financial Services Commission (FSC) will discuss the shutdown of the Seoul branch of Australia-based global investment bank (IB) Macquarie Bank at the upcoming regular meeting on June 26. The branch closure is part of the bank's restructuring plan which has been promoted since the end of last year to integrate its securities and banking businesses. Macquarie Bank returned the Seoul branch's securities business license to the financial regulator on June 12. The bank’s securities business will be transferred to Macquarie Securities and its foreign exchange and won currency loan services will not be available from June 26.
In addition, Indian Overseas Bank, which entered the domestic market in 1977, recently told the financial regulator that it would withdraw the South Korean branch. Indian Overseas Bank, the sixth largest bank in India, has 3,300 branches in its home country and had a total asset of US$38.50 billion (45.30 trillion won) as of the end of last year. It is a state-run bank whose stake is owned by the central government, but it operates like a private bank. The bank made a huge profit by borrowing U.S. dollars at low interest rates from the head office and providing the funds to local companies running business in South Korea and Indian people in the 1980s and 1990s when South Korea achieved a rapid growth. However, it decided to close down business in South Korea in 42 years after entering the market due to lower profitability caused by stronger financial regulations with low growth and low interest rates becoming permanent in the 2010s.
As the two banks decided to withdraw from the South Korean market, foreign banks’ escape from the country is expected to continue this year again. After the government selected Seoul and Busan as the international financial hub in 2009, the number of foreign banks’ branches in South Korea increased for a little while but has since been on a steady decline. The figure grew from 53 in 2011 to 56 in 2013 but dropped to 45 last year.
The number of foreign banks which ran business in the domestic market last year stood at 38 and their combined assets came to 274.50 trillion won (US$233.32 billion), up 5.4 percent from the same period a year earlier. However, this was due to an increase in gains on valuation of bonds caused by a fall in interest rates, and the actual profit structure is still not good. The South Korean branch of Indian Overseas Bank saw its return on asset (ROA) go negative in 2016 and losses expand from -5.78 percent in 2017 to -7.01 percent in 2018.
Foreign banks operating business in the domestic market point out that the government is just saying that it would establish a “financial hub” and a “financial center” without taking specific action. They noted that the government said it would improve entry conditions to South Korea for foreign financial firms but there have been no practical measures. South Korea’s large banks almost monopolize the retail finance market, including household loans. For corporate loans, it has become more difficult for foreign banks to enter the niche market with the advance of the capital market as they are losing out in the direct financing market, including corporate bonds. In particular, the market for the derivative product sales, which had been a major revenue source of foreign banks for a long time, including equity linked warrant (ELW), virtually ground to a halt because of the government’s stronger regulations. Given the situation, an increasing number of foreign banks pulled out of South Korea and Seoul ranked 36th out of 112 cities around the world in the recent Global Financial Centers Index (GFCI)ranking, which evaluates the competitiveness as an international financial city. Busan also slid from 24th to 46th over the same period. The government asks foreign financial companies to come to South Korea but there are no reasons for foreign financial firms to enter the South Korean market.
Foreign banks agree that they can find a new growth engine if the government relaxes regulations on the financial market environment. However, the current government is strengthening regulations further on the domestic financial industry. An official from a foreign bank said, “Under the current government, financial authorities tend to emphasize the role of banks as public goods to support funds to companies instead of seeing it as the industry that creates new added value. In this environment, foreign banks will not seek for new business in South Korea.”