Foreign banks that posted record results 4th are sailing smoothly this year as well. They are delivering results in noninterest income, such as foreign exchange and derivatives gains stemming from exchange-rate swings. While many foreign banks left Korea over the past three years, those that remain are expanding their headcount and scaling up.
According to the Financial Supervisory Service ( FSS) on 24th, first-quarter net income of the 33 domestic branches of foreign banks came to 960.5 billion won, up 11.9% from the same period a year earlier (858.0 billion won). The domestic branches of foreign banks posted 1.7801 trillion won in net income last year, the highest since the FSS began compiling the data, and they are showing signs of surpassing that.
Japanese banks, in particular, stood out. MUFG Bank, which first set foot in Korea in 1967, recorded first-quarter net income of 226.7 billion won, the most among peers. MUFG Bank is the Korea branch of Japan's Mitsubishi UFJ Financial Group. Mizuho Bank followed with 175.2 billion won, and Sumitomo Mitsui Banking Corporation with 104.2 billion won.
Notably, MUFG Bank's return on asset (ROA) was 1.35% in the first quarter this year, outpacing major domestic banks that are under 1%. With no burden to expand branches nationwide, it can manage its limited asset more efficiently to generate revenue. Its return on equity (ROE), which is linked to corporate value and share price, was 7.78%, lower than major domestic banks, but given its structure that relies on an overseas head office, that is not seen as a major issue.
The asset size of the 33 domestic branches of foreign banks once shrank to 357 trillion won in 2022, but rebounded to 430 trillion won in the first quarter this year, recovering to the level of the first quarter of 2023. Headcount has also risen each year, from 2,887 employees in 2021 to 3,037 last year. MUFG Bank, which recorded the largest net income, had 184 employees, the most among peers. It is evidence that they still view the Korean market as important.
Foreign banks are delivering results in foreign exchange and derivatives, a noninterest income area. They borrow dollars overseas, such as from their head offices, exchange them into won for operations, and then repay in dollars. Gains are made depending on exchange-rate movements, which is a primary business method for foreign banks.
In fact, the 33 domestic branches of foreign banks posted 434.9 billion won in net interest income in the first quarter this year, while net gains from foreign exchange and derivatives reached 1.037 trillion won. They rely so heavily on foreign exchange and derivatives that most of their revenue comes from them. However, a downside is that revenue can deteriorate with exchange-rate volatility.
Some also argue that regulations should be applied flexibly so that foreign financial companies, including foreign banks, can take root domestically. A representative example is keeping the domestic foreign exchange market open 24 hours. Until now, the domestic FX market was limited to 3:30 p.m., and only in Jul. last year was it extended to 2 a.m. the next day. There remains a big gap with the global FX market, which is open 24 hours on weekdays. Longstanding issues also remain, such as allowing foreign banks to issue bank bonds and the network separation that requires bank business IT systems to be isolated from external networks.
Korea Citibank, a foreign bank, declared in 2021 that it would exit the retail finance market for individual consumers. It lost competitiveness in the retail market dominated by major commercial banks. Instead, Citibank reshaped its portfolio around noninterest income, and in the first half of this year noninterest income was 162.3 billion won, outpacing interest income (128.7 billion won). Hongkong and Shanghai Banking Corporation (HSBC) also gave up retail banking in 2013. Since 2013, 11 foreign banks have withdrawn from Korea.