Korean banks post significant H1 profit drop at overseas operations

South Korea’s top four banks saw a significant drop in their overseas earnings in the first half as they focused more on domestic businesses such as increased consumer lending for higher interest earnings, industry data showed on Friday.

The four big banks — KB Kookmin, Shinhan, Hana and Woori — posted a combined net profit of 337.9 billion won ($253 million) from their overseas operations in the first six months of the year, down 38.1% from 545.6 billion won in the year-earlier period.

The banks attributed their weak performance to rising borrowing costs due to higher benchmark interest rates in the countries where they operate and higher loan loss provisioning owing to rising delinquency rates amid an economic slowdown.

Regulatory challenges from foreign financial authorities were also cited as an obstacle. Since September 2023, the four banks have faced 25 sanctions from overseas authorities.

Shinhan Bank was the only one of the four to see a profit increase. Its first-half net profit rose 14% on-year to 296.2 billion won from 260 billion won.

Woori Bank’s overseas subsidiaries saw their net profit fall 38.2% to 94.4 billion won, while Hana Bank posted a 10% on-year decline to 70.1 billion won.

KB Kookmin Bank turned to a 122.8 billion won net loss from a 55.1 billion won profit a year earlier.

OVERSEAS EARNINGS HALVED

The four banks, which posted record overall earnings in the first half, said their overseas gains accounted for a mere 4.8% of it.

Of 6.98 trillion won in combined net profit, just 337.9 billion won came from their overseas operations.

Their dependence on domestic operations has deepened over the past decade.

Back in 2014, the overseas earnings of the 10 largest Korean banks accounted for 10.2% of their total profits.

Despite Korean banks’ globalization push over the past two decades following the Asian financial crisis, their number of overseas branches have decreased.

According to the Financial Supervisory Service, the number of Korean banks’ overseas branches, including subsidiaries and offices, dropped to 202 last year from 207 in 2022. That even falls short of the 257 branches run during the 1997 Asian financial crisis.

INCREASED DOMESTIC RELIANCE

Meanwhile, Korean banks’ reliance on domestic operations has increased.

In the first half of this year, domestic banks’ interest income stood at 29.8 trillion won, accounting for 89.8% of their total profit of 33.2 trillion won.

That percentage was higher than the 88.6% for the first half of last year.

Kim Yun-joo, head of the financial business at Boston Consulting Group Korea, said: "While Korean banks were making easy money with higher interest gains locally, their overseas expansion strategies have been stagnant for several years. They need to look at cases where global banks have succeeded by leveraging competitive advantages in infrastructure investment or trade finance."

Analysts said Korean banks also need to diversify their overseas expansion strategies from those that focus on retail banking.

In corporate finance abroad, banks can create additional business opportunities not only through lending but also by connecting to services such as foreign exchange transactions, cash management and consulting, they said.

Write to Jae-Won Park, Bo-Hyung Kim and Eui-Jin Jeong at wonderful@hankyung.com
In-Soo Nam edited this article.