Revised rules bolster Korean banks’ competition, but no silver bullet to thriving: analysts

The proposed revisions will pave the way for mergers and bolster competitiveness.

South Korea’s recent moves to ease ownership of financial institutions will bolster competition amongst regional banks, but don’t expect a big shake up in the market share, analysts told Asian Banking & Finance.

In July, the country’s Financial Services Commission (FSC) floated plans to ease rules in foreign ownership and even ownership of non-finance entities. Examples listed by the FSC include a local insurance company being allowed to own a foreign bank operating in an overseas market; or a credit finance business being able to acquire a rental car business in an overseas market.

The FSC has also proposed easing rules on the maximum level of credit that a local financial company can extend to its foreign subsidiary for a certain period of time.

Notably, domestic regional banks may now apply to expand into nationwide commercial banks, provided they meet requirements such as having sufficient financial resources.

The proposed revisions, when passed, will also pave the way for mergers between savings banks, which will bolster their competitiveness, according to Gary Ng, senior economist at Natixis Corporate & Investment Banking.

“Allowing regional banks to operate nationally should boost competition, product offerings and innovation for SMEs and consumers,” Ng told Asian Banking & Finance.

This enhanced flexibility, though, is unlikely to cause a major shakeup in the Korean banking industry. What it does is create the opportunity for regional banks to expand their operations.

“Regional banks’ assets only grew 5.8% annually between 2017-2022, whilst the nationwide commercial banks enjoyed a faster growth rate of 7.8%,” Ng pointed out. “If regional banks can now attract deposits with higher interest rates nationally, they can expand their operations more easily.”

Competition
If the goal were to stimulate competition and cut the dominance of big players, experts are skeptical that easing the rules would change the status quo.

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Jinho Ryu, EY partner and Korea Banking & Capital Markets leader, said that the five nationwide banks will still remain dominant even after the FSC will have introduced the changes.

“It would take time for new nationwide players to have enough impact to boost competition among major firms,” Ryu said, noting that five local banks make up 73% of the market share in the country.

In the short term, new players who enter the market are expected to concentrate on markets that existing commercial banks do not put a lot of effort into, such as mid-low credit borrowers, precisely to avoid competition.

Ng echoed this sentiment. “More flexible arrangements do not necessarily mean the current regional banks can replace the large players easily, especially as they only comprise 11% of total banks’ assets. It shows the constraints that it is hard for them to attract large clients,” he said.

The regional banks and digital banks — which make up 3.5% of total assets in South Korea —  are likely to remain focused on servicing small-and-medium enterprises and households in the near future.

“In addition, having a more physical presence is great, but technology is a game changer nowadays, and capital can be very mobile with competition also from virtual banks. As such, it is likely to see a large share of regional banks in the short run, but how far it will increase will depend on whether they can ultimately offer the most cost-effective or tailored solutions for their clients,” Ng said.

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The FSC could also be playing quite the smart maneuver.

“In the long run, once they build up size comparable to existing commercial banks, they would be able to compete more directly, which would address some of the concerns around lack of competition in the market,” Ryu said.

More red tape unraveled
Ng expects Korea to continue cutting back the red tape and allow financial institutions to compete firmly.

Further actions may involve not just financial institutions, but also non-bank financial institutions, he speculated.
On what other reforms that Korean authorities should consider, Ryu noted easing the rules on separation of industrial and financial capital, for example.

Financial institutions have been restricted from owning non-financial subsidiaries to protect and guarantee the independence of financial companies.

“If the rules are relaxed, banks will be able to invest in non-financial areas, diversify revenue streams and ultimately provide more customised services to their customers by utilising their existing consumer data and business capabilities in non-financial areas,” Ryu said.

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Foreign banks might be iffy
As for any new licenses for a new nationwide bank, Ryu believes that interest would come from Korea’s regional banks. Foreign banks are unlikely to be keen to launch in South Korea.

“Recently a couple of foreign financial firms have left or decided to withdraw from Korea’s retail banking business. That’s mainly due to declining profits, rising costs, stricter financial regulation and high corporate tax. Taking that into account, foreign banks probably wouldn’t be interested in new nationwide licenses,” the EY partner and expert said.

Meanwhile, there are already regional banks who said that they will go through the process of shifting to become a nationwide commercial bank.

“If it goes ahead and gets the necessary approvals, we could already see a new nationwide bank launch, probably next year,” Ryu said.