Korea's virtual banks still struggle to find footing

Lenders grapple with low profitability and limited capital two years since they kicked off.

After two years since their debut, Korean virtual lenders Kakao Bank and K Bank have managed to capture just 0.6% of the KRW-denominated loans market as of end 2018, according to a report by Moody’s with data from the Financial Supervisory Service (FSS). The lenders have been the most active in the unsecured personal loan market with plans to extend to retail loan segments like mortgages.

“Korea’s two virtual banks have brought modest competition in some retail loan segments but no broad disruption in the two years they have been operating,” the report said.

To jockey for market share, the ratings agency noted that K bank has a loan portfolio geared toward non-prime borrowers or individuals with credit rating less than four out of 10, pushing its delinquency rate above the regional banks.

Meanwhile, Kakao Bank, with a higher portion of prime borrowers, has shown better asset quality compared to its commercial bank peers. Kakao Bank has focused its lending business on prime borrowers, and its proportion of loans with lending rates of less than 4% was at around 82% of total newly extended loans in May 2019.

“Virtual banks have not yet shown competitive advantages in using proprietary data sources for underwriting. We expect asset quality of the virtual banks will reflect on the risk undertaken in terms of the proportion of high risk borrowers,” Moody’s said.