[Finance Microscope] "Win or Defend"... Banks Embark on Fierce Battle for Local Government Treasury Accounts

Domestic banks are bracing for fierce competition this year over the coveted positions of municipal treasury managers. With the Seoul Metropolitan Government officially beginning its selection process, other lucrative regions such as Incheon, North Gyeongsang Province, and South Jeolla Province-each with sizable budgets-are also lined up for bidding. Since the outcome is expected to be determined primarily by interest rates and contributions, banks are now closely monitoring each other in efforts to minimize losses.

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According to the financial industry on April 22, a total of 79 local governments will see their treasury management contracts with banks expire this year. Among them are major municipalities, including the Seoul Metropolitan Government, whose total budget exceeds 51 trillion won, as well as Incheon (15.3 trillion won), North Gyeongsang Province (14 trillion won), and South Jeolla Province (12.7 trillion won). This is putting banks on high alert.

The most intense competition is expected in Seoul. The city’s total budget for this year, combining the general and special accounts, stands at 51.4778 trillion won-far surpassing other local governments in scale. The bank that secures the treasury management rights will oversee not only ordinary income and expenditures but also manage funds and more. There are also numerous ancillary transactions, such as managing side businesses and the payroll for civil servants. Beyond expanding their deposit base, banks can enhance their reputation and credibility by becoming Seoul’s main banking partner.

Currently, Shinhan Bank manages both the first and second Seoul municipal treasuries, but a head-to-head contest with Woori Bank, which is seeking to reclaim the position, is expected. There is also industry interest in whether KB Kookmin Bank, which achieved record earnings last year and boasts strong financial resources, will enter the race.

Evaluation criteria place the greatest weight on treasury management capabilities (28 points) and the creditworthiness and financial stability of the financial institution (25 points). However, these factors do not clearly differentiate among major commercial banks. Considering this, most experts believe that interest rates and contributions will ultimately determine the winner. In particular, the score for demand deposit interest rates has been raised from 6 to 8 points. Since most of Seoul’s funds are managed through demand deposits, this means the authorities will focus on actual returns.

Among demand deposit accounts, public funds deposits carry a fixed interest rate. For banks, the expanded weighting of fixed rates makes setting the rate even more challenging. A commercial bank official noted, “Given the unpredictable interest rate environment, setting a rate that will be frozen for four years is virtually like fortune-telling,” adding, “It also requires board approval, which makes it a tough decision.”

Although the contribution for cooperative projects-essentially a donation to Seoul-is worth only 2 points in the evaluation, the industry still considers it a meaningful variable. A commercial bank representative commented, “While contributions do not determine the outcome, differences in proposals between banks are more intuitively reflected in contributions than in interest rates.”

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In the second half of the year, bidding will open for the Incheon municipal treasury, which manages a budget of 15 trillion won. Currently, Shinhan Bank manages Incheon’s first treasury, while NH Nonghyup Bank oversees the second. Unlike Seoul, Incheon employs a dual treasury system, selecting different banks for each.

The industry is watching closely to see whether Hana Financial Group’s headquarters relocation will shift the dynamics in the Incheon treasury selection. Earlier this year, Hana Financial announced at its general shareholders’ meeting that it plans to relocate its headquarters to Cheongna International City in Seo-gu, Incheon, by September. This move provides an optimal opportunity to highlight its contribution to the local economy. Hana Bank previously applied for both treasuries in 2022 but was unsuccessful.

Outside the metropolitan area, North Gyeongsang Province is preparing for its own bidding process. The focus will be on the challenge from traditional manager Nonghyup Bank, commercial banks, and whether iM Bank can defend its home turf.

In South Jeolla Province, the administrative integration with Gwangju is emerging as a new variable. Gwangju and South Jeolla Province are pursuing administrative integration with a target date of July this year, and the competition is heating up over which bank will manage the unified general account treasury. Currently, Gwangju Bank operates Gwangju’s first treasury, while Nonghyup Bank manages South Jeolla’s first treasury. Both local governments plan to select a treasury operator through evaluations in the second half. Should Gwangju and South Jeolla Province merge, the combined budget will increase to about 25 trillion won.

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