At a glance
- South Korea’s government opened the banking sector to regional players to break the oligopoly of its top five banks, but progress remains slow
- While some regional players are looking to obtain a nationwide commercial banking licence, it is still difficult for many institutions to achieve
- After years of foreign banks leaving the country, the government seeks to attract new players, but further measures may be necessary
South Korea’s banking sector has long been dominated by a handful of big financial companies. According to a report by S&P Global, the country’s top five banks held 74.6 per cent of total assets as of March 2023.
Last year, the government opened the industry to new players by introducing a set of measures aimed at liberalising the banking sector, which came into full force immediately after the announcement. Is the new system bringing results?
In July, South Korea’s Financial Services Commission, tasked to formulate financial policies and supervise financial institutions, announced a new government plan to permit more online banks to operate by further easing the entrance of new players into the sector. The plan came almost a decade after the FSC announced its strategy to facilitate the integration of new technologies within the banking sector.
The FSC measures allow regional banks, which can only operate in their specific geographical areas, to seek nationwide commercial banking licences and open branches across the country. Additionally, they aim to promote competition, reduce interest rates, enhance loss-absorbing capacity and foster corporate social responsibilities.
The move followed comments made by South Korean President Yoon-Suk Yeol in February 2023, in which he criticised the country’s banks for enjoying soaring profits while the Korean population endured some of the highest loan rates in recent years.
“At the moment, regional banks can only operate within their specific jurisdictions, and, although we are seeing some relaxation in the rules, we still haven’t witnessed any major developments since the announcement of the policies,” says Matt Choi, director and primary rating analyst at Fitch Ratings.
Six months on, only regional lender DGB Daegu Bank is seeking to obtain a national commercial banking licence, according to Choi.
A tough market
While the measures intend to make the South Korean banking system more competitive, it is still too early to say whether many regional players will be able to carve out their space within the market. They will have to compete with much bigger institutions that have learned how to play the field over decades of presence.
Jinho Ryu, partner and Korea banking and capital markets leader at EY, says that, aside from regulation, there are other factors preventing financial companies from obtaining nationwide commercial banking licences.
“Obtaining a nationwide licence is a big investment for a regional bank because not only [do] they have to upscale their internal systems, but also expand their presence in the country by opening new branches,” he says.
Based on data collected by S&P Global, the regulatory requirements by which a regional bank needs to abide in order to branch out into the national commercial banking sphere include holding more than Won100bn (£59mn) worth of capital, a business plan, a shareholder qualification and an efficient IT system.
Ryu says that he foresees some growth over the next few months in the digital banking sector. Currently, only KakaoBank, K Bank and Toss Bank have obtained a digital banking licence. “A lot of firms are currently looking to get a digital banking licence, because it is proving to be a very profitable segment of the market and because it doesn’t require opening new branches,” he says. “Even the traditional banks, they invest a lot of money in their digital channels.”
According to Choi, the reforms will not drastically change the landscape of the Korean banking sector, but they will give more leeway to new players, such as digital banks, to develop new products and bolster competition.
“These banks are expanding the scope of services that you can get through your phone; for example, KakaoBank first developed a new tool that allows clients to apply to residential mortgages through their phones in recent years, but large commercial banks quickly caught up,” he says.
Attracting foreign banks
South Korea is also looking for ways to attract more foreign institutions, following the exit of several players from the market in recent years, including Goldman Sachs, Barclays and UBS.
According to Choi, the new framework is insufficient to make the Korean market particularly appealing to foreign institutions. “Profitability-wise, the Korean market is still not as enticing to foreign players as some of the world’s most developed markets, like the US, and the system is more tightly controlled and regulated by the authorities,” he says.
Loan-to-deposit ratio rules are also expected to temporarily loosen for banks, including for the local branches of international institutions, which will help them lend to businesses more effectively, according to the FSC.
