This is the first of a series highlighting Korean banks' operations in Southeast Asian countries. ― ED.
By Yoon Ja-young
Korean banks have been actively advancing into Southeast Asian countries, seeking new business opportunities in the blue ocean market. Amid toughening competition and regulation in some countries, however, experts advise that banks need consistency in their Southeast Asia strategy, based on a long term perspective.
According to Korea Development Bank (KDB) Research Center, Wednesday, Korean banks have 13 local corporations, 17 branches and 23 offices in Southeast Asia as of June last year.
Their advancement overseas has to do with worsening profitability in the Korean market, triggered by low economic growth and a low interest rate coupled with saturated demand.
"The current low growth and low interest rate is what the Korean economy has never experienced before. It is pressuring management of the banks, pulling down their growth and making it difficult to recover profitability," notes Yang Won-geun, a visiting researcher at the Korea Institute of Finance.
"The Chinese economy, which has the biggest influence on the Korean economy, has completed its high growth era. Korea's domestic market is also facing difficulties with income growth faltering and record household debt hampering consumption. An aging population and falling asset prices are also lessening economic vitality."
Net interest margin of banks have continued falling here since the global financial crisis, marking 1.55 percent in 2016. The figure is between 1.5 to 2.5 times higher in major Southeast Asian countries, which makes them attractive for Korean banks.
Kang Meang-gu, a senior researcher at the KDB Research Institute, notes that Korean banks were attracted by the high growth potential of the Southeast Asian market. Most of all, its population is continuing to grow.
Five major countries of ASEAN: Indonesia, Vietnam, Thailand, Malaysia and the Philippines, have been recording around 5 percent economic growth annually, on average, amid increasing foreign investment.
Korean businesses' advancement into the region is another attraction for Korean banks. They have been switching from China to Southeast Asia after the global financial crisis, due to rising wages and strengthening regulations on foreign companies that aggravated their profitability.
Southeast Asia, meanwhile, provided cheap but skilled labor, as well as diverse incentives for investors and geographical strength as a production base in Asia. As of last September, 2,785 manufacturers including Samsung, LG and their suppliers were operating in Vietnam, as well as 1,080 Korean manufacturers in Indonesia, and 98 in Myanmar.
Increasing infrastructure and facility investment in the region is also expanding demand for financing. Indonesia's infrastructure market is expected to mark an average 7.8 percent growth annually between 2017 and 2021, and Vietnam expects 6 percent growth annually.
Southeast Asian countries are also actively opening doors for foreign banks, encouraging M&A or acquisitions of stakes in local banks.
However, there is a concern that Southeast Asia may turn into a "red ocean" for Korean banks, especially if they only focus on Korean firms or Korean residents in the region. Experts thus stress the need for new income sources as well as diversified strategies.
Kang advises Korean banks to focus on digital finance based on fintech for success and high profitability. Fintech refers to the convergence of financial services and technology.
"Korean banks with digital technologies have strength in fintech. They have enough of a competitive edge in the Southeast Asian market."
He said that Korean banks have more competitiveness in fintech for the corporate sector rather than retail.
He also advises concentration on sectors where each bank has a competitive edge. "For instance, NH Nonghyup specializes in financial services for the agricultural sector while the Industrial Bank of Korea (IBK) has strength in services for small- and medium-sized enterprises. It should be the same when they advance into Southeast Asia."
Experts also point out that Korean banks lacked consistency from a long term perspective. Despite a request by the Thai government to remain, some Korean banks closed down their branches in Thailand after the Asian financial crisis, which made the Thai government negative toward Korean banks' return to the country.
Analysts also advise setting up a core network in each country.
"Korean banks have been concentrating on Vietnam, Myanmar and Indonesia, but Southeast Asia has huge growth potential for banks thanks to increasing domestic demand and foreign direct investment," Kang notes.
He cited Laos and Cambodia, which have been marking 7 percent annual growth during the past five years, as popular destinations for Korean manufacturers for years to come.
"Moreover, these countries are continuing infrastructure construction. Demand for facility financing will increase as a result," he added.
Yang advised that Korean banks should go beyond setting up offices or overseas branches in offshore market. "They should take more aggressive strategies, such as M&A or investment in local players. Especially, they should actively advance into the long-term loan market in Asia such as infrastructure financing," he said.