Domestic Banks Achieve Record-Breaking Performance... Foreign Banks Show Mixed Results

SC Jeil Bank Q1 Net Profit 102.9 Billion KRW Up 9.7%
Meanwhile, Citibank Down 19.4% to 48.2 Billion KRW
NIM Deterioration, Restructuring, and Regulation Are Common 'Risks'

[Asia Economy Reporter Song Seung-seop] Foreign banks SC First Bank and Citibank Korea showed contrasting results in their first-quarter earnings this year. While SC First Bank performed well despite the worsening business environment due to COVID-19, Citibank Korea, which announced its withdrawal from domestic retail banking, saw its key revenue indicators deteriorate rapidly. However, it is pointed out that passive restructuring, mergers and acquisitions (M&A), and increasingly severe financial industry regulations pose long-term risks to both banks.

According to the financial sector on the 20th, SC First Bank and Citibank Korea recorded net profits of 102.9 billion KRW and 48.2 billion KRW, respectively, in the first quarter. SC First Bank grew by 9.7% (9.1 billion KRW) compared to the same period last year, whereas Citibank Korea shrank by 19.4%, decreasing by 11.6 billion KRW. Interest income also increased by 12.6 billion KRW (5.46%) to 243.2 billion KRW for SC First Bank, but Citibank Korea’s interest income fell by 27.2 billion KRW (-11.70%) to 205.2 billion KRW. The performance gap between the two banks was clear even when compared to the first quarter of 2019 (74.3 billion KRW and 60.1 billion KRW, respectively).

In particular, Citibank Korea’s decline is notably steep. Its net profit, which was 249.4 billion KRW at the end of 2019, dropped to 187.7 billion KRW by the end of last year. Interest income before expenses also decreased from 1.3572 trillion KRW to 1.0895 trillion KRW.

Even SC First Bank, which posted solid results in the first quarter this year, showed some slowdown by year-end. Net profit was 248.7 billion KRW, down 62.7 billion KRW from the previous year, and interest income contracted by 186.2 billion KRW from 1.6233 trillion KRW to 1.4371 trillion KRW.

Notably, both banks have seen a sharp decline in their core profitability indicator, the net interest margin (NIM). NIM represents how much net interest income is earned per unit of operating funds. At the end of 2018, SC First Bank and Citibank Korea had NIMs of 1.45% and 2.47%, respectively, but these fell to 1.23% and 2.05% within two years. In the first quarter of this year, SC First Bank recorded 1.17%, while Citibank Korea’s NIM fell below the 2% mark to 1.94%.

Passive Restructuring and Government/Regulatory Restrictions Are Common 'Risks'

This contrasts with domestic commercial banks, which posted record earnings despite NIM deterioration and COVID-19 challenges. According to the Financial Supervisory Service, domestic banks’ net profit in the first quarter reached 5.5 trillion KRW, a 71.8% increase from the same period last year. Although non-recurring factors at KDB Industrial Bank influenced this, the net profit of the five major banks (KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup) alone rose by 12.8%, outperforming foreign banks. The first-quarter NIM also rose by 0.05 percentage points to 1.43%, halting the decline that had continued since the first quarter of 2019.

One reason cited is that, unlike domestic banks, foreign banks failed to reduce labor costs quickly through active restructuring. Last year, 2,515 employees from the five major banks applied for and took early retirement. The total number of employees also decreased by 1,480 (-1.9%) from 77,645 at the end of the previous year to 76,165, accelerating the decline compared to the previous year’s 323 retirements. In contrast, SC First Bank and Citibank Korea only reduced their workforce by 52 (-1.23%) and 23 (-0.69%) employees, respectively.

Negative factors also include increasingly severe government and regulatory interventions, such as dividend payout restrictions and profit-sharing systems. Most banks, including Citibank, had to comply with the Financial Services Commission’s recommendation to limit dividend payout ratios to 20%. The reduction of the legal maximum interest rate, the Financial Consumer Protection Act, and the Microfinance Act have either been implemented or are under revision.

Professor Lee Byung-tae of KAIST Business School analyzed, "Foreign banks entering Korea have generally either withdrawn or refrained from expanding their businesses significantly. Due to various regulations and competition, they judged that profitability in Korea would not be substantial."

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