South Korea's banks to get a boost from promised lighter regulation

South Korea 10,000 won notes are arranged for a photograph in Seoul, South Korea, on Monday, Aug 8, 2011.-- PHOTO: BLOOMBERG
South Korea 10,000 won notes are arranged for a photograph in Seoul, South Korea, on Monday, Aug 8, 2011.-- PHOTO: BLOOMBERG

SEOUL (Reuters) - South Korea's banks, whose average returns on equity are the worst among lenders in Asia and are less than half of their Chinese peers, are poised to benefit from a promised move by the country to ease heavy-handed regulation.

Stifling regulation has crimped banks' freedom in Asia's fourth-largest economy to charge rates and offer products based on market demand, tying their hands in the struggle against a slowing economy and low interest rates.

Regulatory intransigence was also blamed by analysts for the collapse last month of the government's fourth effort to sell a controlling stake in No 2 lender Woori Bank after attracting a lone Chinese bid. "It's very hard to suggest new products without getting hemmed in by regulations, written or oral," said a senior executive at a large Korean lender, declining to be identified because of the sensitivity of the matter.

In September, for instance, financial regulator Financial Supervisory Service (FSS) summoned the vice presidents of four of the country's largest banks to ask them why the interest rates they charged on some mortgage loans had risen despite a cut in the central bank's main policy rate.

While the law gives lenders freedom to set their own rates, bankers familiar with the episode said the implication of such unofficial "oral guidance" was clear: the banks should lower their rates.

An FSS official said the September meeting with the bank executives was to hear the banks' side of interest rate direction in order to understand what is going on.

Things may be about to change, though. The new head of FSS has pledged to consider ways in which banks can have more room to run operations as they see fit. "We will listen more closely to the market's hopes for improvements in regulatory customs, such as unclear and arbitrary oral guidance," said Zhin Woong-seob, as he took the helm of the country's top financial watchdog last month.

The change will help banks become more proactive, although fundamental market conditions remain challenging. The government on Monday cut its economic growth forecasts for both this year and next.

Inflexible labour rules and lenders' inability to raise fees in a fiercely competitive environment are the other factors dampening bank returns.

"Korea's banking sector is facing a number of headwinds from a subdued operating environment and intense competition, which is dampening banks' profitability and growth prospects," ratings agency Fitch said in a Dec 9 report, in an assessment of 2015.

Lenders have started taking steps in response to the market situation. Global players such as Citi and Standard Chartered have been scaling back operations in Korea.

Banks including Korea's top lender Kookmin Bank have begun cutting costs by trimming branches. In the year through July, the sector lost nearly 300 bank branches, but this is just 5 per cent of the total.

Woori and Shinhan Bank are among those expanding abroad, while Hana Bank and NongHyup Bank are trying to sell more funds or insurance products.