Profitability of South Korean banksSouth Korea's banking sector consists of six national and regional banks each, three digital banks, five government-affiliated specialized banks, and 35 foreign bank branches. KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank are among the largest commercial banks in terms of total assets. Following the outbreak of the COVID-19 pandemic, domestic banks' net income and net interest margin (NIM) declined due to increased loan loss provisions, but an upward trend is discernible.
The main source of income for South Korean banks has traditionally been the interest they receive on various loans to companies and individuals. Non-interest income accounts for a relatively small share. However, given the low interest rates in recent years and growing competition in the banking sector, domestic banks have started to gradually increase their non-interest income. For example, they have taken various measures, such as expanding abroad or extending services into areas such as asset management, telecommunications, and food delivery services.
Digital competitionDigitalization is another keyword for the banks' innovation efforts. South Korea’s mobile banking industry has grown rapidly over the last few years. Accordingly, the entry of large fintech companies and digital banks into the banking sector has put enormous pressure on traditional banks. For example, Kakao Bank, one of the first digital banks in South Korea, has quickly become not only one of the most popular banks in South Korea but also one of the leading digital banks in Asia.
Having been gradually forced to close their branches in recent years, traditional banks have expanded their online and mobile banking services and launched better and more customer-friendly apps. How traditional banks will deal with increasing digital competition and to what extent digital banks can and will replace traditional banks will be another interesting aspect in the development of the South Korean banking sector.