‘Banks should question their purpose of existence’

Pressured by the imminent intrusion of internet-only banks and financial technology startups, Korea’s local lenders should ask themselves whether they will be able to keep existing, the head of an association of banks said Wednesday.

“The local banking industry’s net interest margins constantly declined last year and their profitability remains at the world’s lowest levels,” Ha Yung-ku, chairman of the Korea Federation of Banks, said at a press conference with five financial institutions -- the KFB, Korea Center for International Finance, Korea Credit Information Services, Korea Institute of Finance and Korea Banking Institute.

“As competition grows intense with the launch of internet-only banks and fintech firms armed with person-to-person investment and overseas remittance services, banks should answer the fundamental question -- we need banking but will banks keep existing?”

The saturated local banking industry is soon to be disrupted by internet-only banks such as K-Bank and Kakao Bank, which are expected to start their services late this month and in the second quarter, respectively.

When K-Bank becomes a new member of the federation in late January, it will serve as a “catalyst” to bring about deregulation and innovation in the banking industry, rather than disrupt the existing banks with conflicts of interest, Ha noted.

With the fourth industrialization accelerated by digitalization, big data and automated intelligence, traditional financial institutions should strive to “internalize” fintech to stay afloat, he said.

“If the traditional banks keep seeking capital inefficient methods such as simple lending, they will not be able to survive,” Ha said.

Ha called for the banking industry to put top priority in risk management this year, with increased global uncertainties over the UK leaving EU and the incoming US administration’s economic policies.

Korean banks’ price to book ratio, or PBR, which compares the stock market’s value to book value, has continued to slide from 1 in 2011 to 0.5 as of August 2016.

“The reason behind the low PBR is high cost and half of this cost comes from wages. Banks should throw away their senior-based payment system and adopt a merit-based one to tackle this issue,” Ha said.

He stressed that the recent hikes of interest rates for mortgage loans at banks to the 3 percent range were not excessive, protecting the banks’ stance that net interest margins at local banks are very low compared to those of other countries of the Organization for Economic Cooperation and Development.

Lim Hyoung-seok, director of the banking and insurance industry division at the KIF, also said the low PBR of Korean banks signals that market participants regard their business model as unsustainable.

Lim cited the example of third-party providers in European countries -- who do not hold accounts but provide payment services for consumers -- that can be used as a benchmark for local financial firms to seek profits through non-face-to-face channels.

By Kim Yoon-mi (yoonmi@heraldcorp.com)