Foreign banks move out of South Korea amid growing competition from locals
Western banks are moving out of South Korea’s (EWY) retail banking business as competition from local players get fierce. Citibank (C) recently announced plans to shut down nearly 75% of its 133 branches in South Korea as weak earnings continue to pressurize its top-line margins. While the bank claimed this was part of its digitization strategy, analysts suggest this is part of broader cost-cutting measures being adopted by most major western banks (XLF) in the country. Citibank Korea’s 2016 net profit declined 43.9% in 2016 to $136 million (156.8 billion won). Earlier in 2017, Citibank had announced plans to expand its wealth management business in South Korea in sharp contrast to other foreign banks operating in the country.
Goldman Sachs (GS), Royal Bank of Scotland (RBS) and Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) have also laid out plans to exit their South Korean operations earlier in the year. With these banks moving out, there will be 40 banks from 16 countries operating in the country.The number of foreign banks in the country grew from 36 in 2006 to 43 in 2016. Foreign banks became more prominent in South Korea’s retail banking business in the years 2000 to 2009, but their profitability suffered.
Goldman Sachs shut down retail banking branches in South Korea to cut costs but will continue to operate its securities branches. Goldman Sachs losses from South Korea were $12 million (13.9 billion won) in 2016. BBVA will also continue to operate a liaison office in the country but has ceased all retail banking operations. HSBC (HSBC) pulled out from South Korea’s retail banking market in 2013 after the company’s failed attempt to acquire Korea Exchange Bank from Lone Star Fund.
As western banks move out of South Korea, repatriation of funds by these banks will be monitored and the Central Bank of Korea should control large-scale capital outflows that could impact the country.
Domestic banks in South Korea
With foreign banks losing out, domestic banks are expanding their share of the pie with the acquisition of customers previously with foreign banks.
The largest South Korean banks by assets are Shinhan Financial Group (055550.KS), KB Financial Group (105560.KS), Hana Financial Group (086790.KS), Woori Bank (000030.KS) and Industrial Bank of Korea (024110.KS).
Investors can also consider ADRs of these South Korean banks on the New York Stock Exchange (NYSE) under the following tickers:
In 2016 the country’s largest bank Shinhan (055550.KS) recorded asset growth of 1.49% while KB Financials (105560.KS) assets surged 12% last year to $33 trillion (375.7 trillion won). Net interest margins of these companies improved to 1.49% and 1.89% respectively in 2016. Shares of Shinhan and KB Financial have returned 9.2% and 34.1% respectively during the year so far. In comparison, the benchmark KOSPI Index (KOSPI) has gained 18.3%. Shinhan Financial Group operated 58 branches and served 18.4 million customers in South Korea as of the end of 2016, while KB Financial’s Kookmin Bank served 30.3 million customers in 2016 and operated the largest number of branches in the country. Shinhan and KB financial are the largest banks in terms of market capitalization with $20.2 billion (23.4 trillion won) and $20.6 billion (23.7 trillion won) respectively as on July 10. Shinhan Bank also holds the position as the most profitable retail bank in South Korea. Retail banking operating profit grew by over 19 % from the year before. Its total retail loans grew 6.3% while cost to income ratio improved by 8.3%.
Comparatively, Hana Financial, Woori Bank and Industrial Bank of Korea operate 892 and 706 branches in South Korea. These banks have assets of $30.6 trillion, $27.8 trillion and $23 trillion in 2016 and reported NIMs of 1.8%, 1.91%, and 1.91% respectively.
YTD shares of Hana Financial have returned 48.6% while that of Woori Bank of Industrial Bank of Korea have returned 48.2% and 16.1% respectively.
Sell side analysts remain bullish on Korean banks as they grab market share from western banks. Shinhan Bank has received 24 buy ratings, and 5 hold ratings, while KB Financial has 30 buy ratings and no sell or hold ratings. Hana Financial has received 26 buy ratings and 3 hold ratings. Sell-side analysts are relatively bearish on Woori Bank and Industrial Bank of Korea as they have received 2 sell ratings each. Woori Bank has received 15 buy ratings and 8 hold ratings while Industrial Bank of Korea has 17 buy ratings and 9 hold ratings.
Valuations within the banking are compressed, trading at 0.6 times its price to book values. JB Financial (175330.KS), Pureun Mutual Savings Bank (007330.KQ), and Kwangju Bank (192530.KS) are the most attractive banks based on their cheap valuations. These stocks have one year forward PBs of 0.45x, 0.46x, and 0.46x and are trading at the steepest discount to their peers. Meanwhile, Shinhan Financial Group (055550.KS), Woori Bank (000030.KS) and KB Financial Group (105560.KS)are the most expensive banking stocks in South Korea with PBs of 0.76x, 0.75x, 0.73x respectively.