South Korea’s Top Banks See Overseas Earnings Drop Amid Domestic Focus

South Korea’s top four banks saw their overseas earnings drop significantly in the first half as they focused more on domestic businesses such as more consumer lending for higher interest earnings, industry data showed on Friday.

The big four banks – KB Kookmin, Shinhan, Hana and Woori – posted a combined net profit of 337.9 billion won ($253 million) from their overseas operations in the first six months of the year, down 38.1% from the 545.6 billion earned in the year-earlier period.

The banks attributed their weak performance to rising borrowing costs due to higher benchmark interest rates in the countries where they operate and higher provision for loan losses due to rising delinquency rates amid an economic slowdown.

Regulatory challenges from foreign financial authorities were also identified as an obstacle. Since September 2023, the four banks have faced 25 sanctions from foreign authorities.

Shinhan Bank was the only one of the four to see an increase in profits. Its first half net profit rose 14% on the year to 296.2 billion won from 260 billion won.

Woori Bank’s overseas subsidiaries saw their net profit fall 38.2% to 94.4 billion won, while Hana Bank posted a 10% year-on-year decline to 70.1 billion won.

KB Kookmin Bank turned to a net loss of 122.8 billion from a profit earned of 55.1 billion a year earlier.

Foreign Earnings Underground

The four banks, which posted record overall earnings in the first half, said their overseas earnings accounted for just 4.8% of it.

Of the 6.98 trillion won in combined net profit, only 337.9 billion won came from their overseas operations.

Their dependence on domestic operations has deepened over the past decade.

Back in 2014, the overseas earnings of the 10 largest Korean banks accounted for 10.2% of their total profits.

Despite the globalization campaign of Korean banks over the last two decades following the financial crisis in Asia, the number of their overseas branches has decreased.

According to the Financial Supervisory Service, the number of overseas branches of Korean banks, including subsidiaries and offices, fell to 202 last year from 207 in 2022. That is even short of the 257 branches run during the financial crisis Asian 1997.

Increase in Domestic Dependency

Meanwhile, Korean banks’ reliance on domestic operations has increased.

During the first half of this year, the interest income of domestic banks was 29.8 trillion won, accounting for 89.8% of their total profit of 33.2 trillion won.

That percentage was higher than the 88.6% for the first half of last year.

Kim Yun-joo, head of the financial business at Boston Consulting Group Korea, said: “While Korean banks are making easy money with higher interest earnings locally, their overseas expansion strategies have been stagnant for several years. They need to look at cases where global banks have succeeded by leveraging competitive advantages in infrastructure investment or trade finance.”

Analysts said Korean banks also need to diversify their overseas expansion strategies from those focused on retail banking.

In corporate finance abroad, banks can create additional business opportunities not only by lending but also by connecting to services such as foreign exchange transactions, cash management and consulting, they said.