Korean banks find new profit engines in Southeast Asia

Southeast Asia is emerging as an increasingly attractive growth market for Korean banks, as strong economic growth, wide lending margins and growing demand for financial services offer opportunities that are scarcer at home.

A flagship branch of KB Prasac Bank stands on Monivong Boulevard in Phnom Penh, Cambodia, offering premium financial services comparable to those in affluent neighborhoods of southern Seoul, such as Gangnam.

Cambodia remains a relatively low-income country, but its economy has continued to expand, posting annual growth of 3 to 4 percent. What makes the country particularly attractive to banks is the wide spread between deposit and lending rates. At one Korean bank operating in Cambodia, the annual interest rate on a one-year time deposit is 4.5 percent, while the rate on small loans of around 2 million won ($1,460) or less reaches 16 percent.

"Southeast Asia has strong potential to become the world's factory, so Korean banks need to move quickly to localize their operations," a banking industry insider said. "In Buddhist countries, there is a belief that failing to repay someone else's money will come back as bad karma, so delinquency rates tend to remain low even when lending rates are high."

Korean banks are seeing a sharp improvement in their overseas operations.

The five major commercial banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — posted a combined net profit of over 1 trillion won from their overseas branches and subsidiaries in the first half of this year, according to data compiled by the JoongAng Ilbo on Monday. 

It was their highest-ever half-year basis profit over the past decade, from the first half of 2016 through the first half of 2026. The figure was 3.2 times the 327.3 billion won recorded in the first half of 2016 and nearly matched KB Kookmin Bank's entire net profit of 1.12 trillion won in the first half of this year.

The overseas earnings of Korean banks began growing rapidly in the first half of 2020. As governments around the world adopted expansionary fiscal policies in response to the Covid-19 pandemic, Korean banks began to see stronger returns from their overseas investments.

This year, restrictions on domestic lending stemming from the government's cap on overall household loans have also prompted banks to turn more attention to overseas markets.

Korean banks have moved in opposite directions at home and abroad — closing domestic branches while expanding their overseas networks.

The five major banks had 2,983 branches in Korea as of the first half of this year, down 30.6 percent from a decade earlier. Their overseas branches and subsidiaries, meanwhile, numbered 109, up 28.2 percent.

The usefulness of physical branches in Korea has declined as more customers turn to online and mobile banking, while face-to-face transactions remain common in many overseas markets.

"An overseas branch essentially represents the right to operate in that country, and if a bank gives it up, it can take years to reenter the market," a banking industry source said. "In countries such as India and Myanmar, where internet connections can be unreliable, bank employees sometimes meet customers in person to collect daily principal and interest payments."

As of the end of last year, India had the largest number of overseas operations by Korean banks at 22, followed by Vietnam with 20, the United States with 17, China with 16 and Myanmar with 14. Asia accounted for 142 locations, or 67.3 percent of all overseas operations.

Many Asian countries still have relatively low income levels, but loan delinquency rates have improved alongside economic growth. In India, for example, the ratio of nonperforming loans — loans overdue for at least three months — nearly halved from 0.48 percent in 2023 to 0.23 percent at the end of last year.

"Many Korean exporters operating overseas tend to be relatively financially sound companies, so delinquency rates on loans to them can be comparatively low," a financial authority official said. "Rapid economic growth in developing countries may also have caused total loan assets to grow much faster than the volume of bad loans."

Despite the high growth, experts warn Korean banks need to reduce their heavy concentration in Southeast Asia and reliance on interest income if they are to succeed in expanding overseas.

SBJ Bank, Shinhan Bank's Japanese subsidiary, for example, has moved beyond transactions primarily with Korean-affiliated companies and expanded into home mortgages for local customers and solar power project financing. 

"Korean banks have not demonstrated much of a competitive edge in advanced financial markets such as the United States and Britain," said Yang Jun-sok, an economics professor at the Catholic University of Korea. "They need to strengthen their risk management capabilities so they can pursue more aggressive expansion."

"The government also needs to provide diplomatic support so Korean banks can confidently localize their operations even in countries with political instability," said Seok Byoung-hoon, an economics professor at Ewha Womans University.

BY KIM DO-NYUN [[email protected]]