Strong Performance Amid Domestic Bank Challenges... Mixed Outcomes for Foreign Firms (Summary)

SC Jeil Bank Q1 Net Profit 102.9 Billion KRW Up 9.7%
Meanwhile, Citibank Declines 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 Korea Citibank showed contrasting fortunes in their first-quarter results this year. While SC First Bank performed well despite the deteriorating business environment due to COVID-19, Citibank, which announced its withdrawal from domestic retail banking, saw its key revenue indicators rapidly worsen. 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 Korea Citibank 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 Korea Citibank 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 Korea Citibank’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, Korea Citibank’s decline was notably steep. Net profit dropped from 249.4 billion KRW at the end of 2019 to 187.7 billion KRW at the end of last year. Interest income before expenses also decreased from 1.3572 trillion KRW to 1.0895 trillion KRW.

Although SC First Bank posted solid results in the first quarter this year, its performance somewhat slowed 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.

Non-interest income declined for both banks. SC First Bank’s non-interest income was 108.9 billion KRW, down 16.9% from a year earlier. While the wealth management (WM) division showed steady growth, the foreign exchange trading division lagged behind the previous year. During the same period, Korea Citibank’s non-interest income fell 13.9% from 98.5 billion KRW to 84.8 billion KRW.

Both banks experienced a sharp decline in net interest margin (NIM), a key profitability indicator. NIM represents the net interest income earned per unit of funds deployed. At the end of 2018, SC First Bank and Korea Citibank 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 Korea Citibank’s NIM fell below the 2% mark to 1.94%.

Passive Restructuring and Government/Regulatory Oversight Pose Common 'Risks'

This contrasts with domestic commercial banks, which posted record profits 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, NH Nonghyup) alone rose 12.8%, outperforming foreign banks. The first-quarter NIM also rose by 0.05 percentage points to 1.43%, halting the downward trend since the first quarter of 2019.

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

The increasingly fierce competition due to continued low domestic interest rates and the emergence of fintech companies and internet banks also played a significant role. The Korea Institute of Finance advised last year that “with the introduction of MyData, expansion of open banking, and the rise of major information technology (IT) companies, market competition in banking will intensify,” and recommended “accelerating digital transformation to improve cost structures and discover business opportunities.”

Negative factors also include government and regulatory interventions such as dividend payout restrictions and profit-sharing schemes. 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 have judged that substantial profits are unlikely in Korea.”

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