Red Light for Overseas Banking Business Due to COVID-19 Spread... "There Is a Breakthrough" (Comprehensive)

Many Companies Show Poor Operating Revenue in Q3 This Year
Limitations in Overseas Expansion Due to COVID-19 Spread
Avoid Reckless Expansion and Establish Localization Strategies Based on Thorough Analysis

[Asia Economy Reporter Park Sun-mi] Although domestic banks are aggressively expanding overseas to strengthen their global competitiveness, they have not achieved significant results due to COVID-19 and global economic uncertainties. This is why there are calls to avoid indiscriminate expansion and instead establish localization strategies based on thorough analysis when entering foreign markets.

According to the Financial Supervisory Service's electronic disclosure system and the banking sector on the 11th, the third-quarter performance of domestic banks operating in major countries such as the United States and China, where asset sizes are relatively large, has been sluggish. Woori Bank's U.S. branch recorded operating revenue of KRW 76.938 billion as of the end of the third quarter this year, falling short of KRW 82.227 billion at the end of the third quarter last year. Woori Sodara Bank in Indonesia also posted KRW 166.921 billion at the end of the third quarter, slightly below KRW 167.999 billion at the end of the third quarter last year, and significantly lower than KRW 231.132 billion at the end of last year.

Shinhan Bank's U.S. branch recorded operating revenue of KRW 61.211 billion in the third quarter, slightly down from KRW 61.452 billion in the third quarter last year. Its China branch posted KRW 159.355 billion in the third quarter this year, down from KRW 175.964 billion a year earlier. Hana Bank's China and Indonesia branches recorded operating revenues of KRW 340.182 billion and KRW 269.674 billion respectively at the end of the third quarter, which was only a modest performance compared to KRW 292.957 billion and KRW 244.18 billion at the end of the third quarter last year.

As banks are recently shifting their focus from the challenging U.S. and Chinese markets to Southeast Asia, IBK Industrial Bank's Indonesian branch has continued to post losses, recording a net loss of KRW 15.1 billion in the first quarter, followed by losses of KRW 2.9 billion and KRW 4.4 billion in the second and third quarters respectively.

Domestic banks have actively worked to expand their overseas branches in recent years. According to the Financial Supervisory Service, as of the end of last year, 12 out of 18 domestic banks operate a total of 168 overseas branches to conduct business abroad.

Despite these efforts, the lack of clear success in overseas expansion reflects the increased uncertainty caused by COVID-19, which has stalled new overseas entries, as well as growing concerns over the deterioration of overseas asset soundness in countries where banks have already established a presence.

"Difficulties in Expanding New Overseas Businesses in the Banking Sector...
Urgent Need for Specific and Sophisticated Localization Strategies"

Senior Investigator Cho Sung-ah of the Korea Deposit Insurance Corporation pointed out in a report titled "Strategies and Implications for Enhancing Profitability of Domestic Banks" released yesterday, "As COVID-19 spread worldwide, lockdowns and movement restrictions in various countries have completely halted due diligence on overseas projects. Consequently, banks' plans for expanding new overseas businesses earlier this year have been disrupted."

"Even for branches already established overseas, there are concerns about the deterioration of overseas asset soundness and contraction of operations due to worsening local economic conditions," she noted. She explained, "Fundamentally, overseas expansion exposes banks to various risks such as foreign exchange risk and country risk, and information asymmetry is severe. Moreover, with the economic downturn and increased uncertainty caused by COVID-19 in each country, understanding local specificities has become even more challenging."

This increased uncertainty has also hindered not only direct overseas expansion but also alternative investments such as overseas real estate and overseas funds, making active execution more difficult compared to before COVID-19.

Senior Investigator Cho advises that while overseas expansion is inevitable for banks to secure continuous revenue sources beyond the limited domestic market, the entry barriers have become higher due to country lockdowns caused by the recent spread of COVID-19. Therefore, banks should segment markets based on each country's growth potential and competition level and pursue overseas expansion under more specific and sophisticated localization strategies tailored to local conditions.

When considering new overseas entries, indiscriminate expansion should be avoided, and localization strategies should be strengthened based on thorough analysis of local customers. Even in regions where banks have already entered, there is an urgent need to establish systematic planning, support, and management systems to foster professional personnel and enhance the use of digital infrastructure.

In the current environment where digital finance is a hot topic, domestic IT technology can be a powerful weapon for overseas expansion. Senior Investigator Cho emphasized, "When expanding overseas, it is necessary to leverage domestic IT capabilities to strengthen the targeting of digital banking demand in overseas markets based on locally suitable segmented business models." She added, "Especially in Southeast Asia, where local financial institution infrastructure is less developed, entering the market through partnerships with fintech companies to develop mobile platforms and provide various applications will enable more active localization."

This content was produced with the assistance of AI translation services.