Banks look for niche markets to sustain revenues

South Korean banks are increasingly banking on new sources of revenue, as traditional income streams are either in decline, or are likely to diminish significantly in a near-zero interest rate world.

For the first quarter of 2014, the combined net income of 18 local banks saw their earnings drop 25.3 percent from a year earlier on contracting interest income and profitability, according to data from the Bank of Korea.

Market insiders say the sharp decline in net interest margin has forced the banks to look more closely at their sources of income.

They say major lenders here have focused on expanding their customer bases, from nonbank capital lenders to foreign investors, in order to find a breakthrough in the challenging environment.

Auto financing is one of the few industries in which banks have yet to take hold, and now they are increasingly tapping into it.

Capital firms, which are especially generous with customers with poor ratings, still dominate Korea’s estimated $32 billion auto-loan industry. Yet, private banks are slowly penetrating the market by offering relatively low interest rates ― the average interest rate on a 36-month auto loan from banks here is around 5 percent, which is relatively low compared with the average of 9 percent offered by capital firms.

Leading the trend is Shinhan Bank. The country’s second-largest lender launched an auto loan service called “Shinhan My Car Loan” in 2010, which was a first for a major local lender. It has loaned more than 1.3 trillion won ($1.2 billion) as of May 2014, the bank said.

“We offer customers low interest rates and no extra (transaction) fees, which makes our installment plans the most attractive in the market,” a spokesman from the bank said.

Apart from auto loan services, banks here are also expanding their resources to target an increasing number of foreign residents in South Korea.

The Korea Exchange Bank, for instance, recently opened a foreign direct investment center on Jejudo Island as part of its expansion strategy to target big Chinese investors.

The resort island is drawing wealthy investors and home buyers from the world’s second-largest economy looking for places to invest in, encouraged by incentives offered by the Korean government.

The bank said the direct investment center has a dedicated team of employees who are fluent in Chinese, and offers specialized services to target the big money investors.

“We provide not only traditional banking services but also real estate and visa consulting services,” an official from KEB told The Korea Herald.

“We’re planning to expand personal financial services to foreign customers as they are becoming more important to us.”

To offer more convenient banking services, some local lenders have also extended their operating hours. KB Kookmin Bank, in particular, runs five “after-bank” branches that stay open until 9 p.m. on weekdays.

The evening banking services, the bank said, are attracting office workers who find it hard to take time off during the day.

“Workers who are interested in loan services find the evening service very useful as they can have more time to gather information and receive our counseling,” an official from the bank said.

By Oh Kyu-wook (596story@heraldcorp.com)