[Regional Finance Survival Strategy]①While Commercial Banks' Net Profit Soars 54%, Regional Banks Grow Only 6%...Why They Face a Survival Crisis

Population Decline and Other Factors
...Regional Banks Lose Ground in Local Markets

Labor Shortages Lead to Weakening Industrial Base

Gap Between Regions and the Capital Area Continues to Widen

Online-Only Banks and Market Changes

Editor's Note
"It is no different from a 'slow death' for regional financial holding companies to exist individually." This diagnosis was presented last month by activist fund Align Partners, which proposed a merger between BNK Financial Group and JB Financial Group. Regardless of their motivation behind suggesting a merger, this starkly illustrates the bleak reality facing regional banks. With local population decline and aging, an exodus of jobs and capital to the Seoul metropolitan area, and regional economic stagnation, regional banks are facing structurally worsening business conditions. Although some have sought to survive by expanding into metropolitan markets and adopting tailored strategies for an aging clientele, these efforts have fallen short. Major commercial banks are increasingly out of reach, while the fast-growing internet-only banks are closing the gap from behind. Through this special series, The Asia Business Daily examines the structural causes that have pushed regional banks to the brink of survival and explores directions and alternatives for structural reform that could ensure their sustainability.

Currently, there are only five remaining regional banks: Busan Bank, Kyongnam Bank, Jeonbuk Bank, Kwangju Bank, and Jeju Bank. After the Asian financial crisis, Chungcheong Bank and Kangwon Bank were absorbed or merged into major commercial banks, and with Daegu Bank transitioning to a commercial bank in 2024, the number of regional banks has shrunk further. Weakening business foundations due to regional economic stagnation, widening scale differences with major commercial banks, and the rapid rise of internet-only banks are forcing regional banks to rethink their survival strategies.

Commercial Banks See Profit Boom, Internet-Only Banks Close In...Regional Banks Stuck in Place

According to the financial sector on August 24, the combined net profit of the five regional banks rose by only 6%, from 572.1 billion won in the first half of 2021 to 606.4 billion won in the first half of this year. In contrast, the net profit of the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori) surged 53.6% over the same period, from 5.3258 trillion won to 8.1780 trillion won.

The gap is even starker when looking at annual figures. The net profit difference between major commercial banks and regional banks widened from 8.2470 trillion won in 2021, to 10.1266 trillion won in 2023, and 12.7266 trillion won last year. While commercial banks have rapidly increased their profits, regional banks have stagnated, causing the performance gap to widen sharply, reminiscent of a “crocodile’s mouth.”

Internet-only banks are also catching up quickly. Their net profit soared nearly fivefold, from 146 billion won in 2021 to 694.8 billion won last year. As commercial banks pull ahead and internet-only banks catch up from behind, regional banks are feeling a double squeeze.

Population and Industry Concentrating in the Metropolitan Area...Regional Slump Directly Impacts Asset Quality

The shrinking presence of regional banks is rooted in demographic decline, aging populations, and a widening development gap with the capital area due to regional economic stagnation. Population loss and aging are leading to labor shortages, which in turn undermine local industries.

According to resident registration statistics from the Ministry of the Interior and Safety, the population of the Honam region fell from 5.74 million in 2020 to 5.632 million last year, while the Yeongnam region dropped from 12.873 million to 12.523 million. In contrast, the metropolitan area’s population increased from 26.043 million to 26.377 million over the same period. As of last year, for every 100 youths (age 0-14), the number of elderly people (65 and over) was 183.8 in the metropolitan area, compared to 232.0 in the Honam region and 237.1 in the Yeongnam region.

Local industries are also struggling. While growth in manufacturing-based industries—concentrated in regional areas—has slowed, high-tech and knowledge-based industries are increasingly consolidating in the metropolitan area. The Seoul metropolitan area’s share of gross regional domestic product (GRDP) surpassed that of the non-capital region in 2015 and has continued to climb, reaching 52.8% in 2024. This prolonged economic weakness is driving away regional banks’ deposit and lending clients, exacerbating their business environment.

The financial soundness of banks rooted in these regions is also deteriorating rapidly. The simple average delinquency rate among the five regional banks stood at 1.33% at the end of June, already exceeding the 1.25% level seen at the end of Q1 2009 during the global financial crisis. With the four major commercial banks’ average delinquency rate at just 0.36%, the regional banks’ rate is more than three times higher. Jeonbuk Bank had the highest delinquency rate at 1.69%, followed by Jeju Bank (1.58%), Kwangju Bank (1.21%), Kyongnam Bank (1.15%), and Busan Bank (1.02%).

Signs of bad corporate loans are appearing across the country. According to the Bank of Korea’s Economic Statistics System, as of the end of May, Daegu had the highest regional corporate loan delinquency rate among domestic banks at 1.29%. Kwangju (1.09%), Jeju (1.09%), and Busan (1.08%) all exceeded 1%. The downturn in local economies is resulting in business failures and weakening financial soundness for regional banks, which in turn tightens local credit supply—creating a vicious feedback loop.

Widening Scale Gap with Commercial Banks...Internet-Only Banks Undermine Their Foundations

Facing a sense of crisis, regional banks are seeking breakthroughs by expanding into the metropolitan area and tailoring strategies toward the elderly. However, the scale gap with commercial banks continues to grow. Commercial banks’ won-denominated loans increased by about 26.3 trillion won from 1,105.8557 trillion won at the end of 2021 to 1,368.4020 trillion won as of March this year. In the same period, regional banks’ loans rose by only about 3 trillion won, from 128.4786 trillion won to 159.0603 trillion won. Commercial banks’ total assets jumped by 464.5 trillion won, from 1,692.6857 trillion won to 2,157.1835 trillion won, while regional banks’ total assets increased by 38.85 trillion won, from 167.3810 trillion won to 206.2284 trillion won.

The launch of internet-only banks has also drastically changed the financial landscape, adding to the difficulties of independent survival for regional banks. A significant portion of low-cost deposits—which had been their strength—is migrating to internet-only banks, making it increasingly difficult for them to defend their net interest margins (NIM). Internet-only banks are expanding their lineup of products and offering aggressive interest rates, threatening regional banks in the household loan market as well.

Internet-only banks’ won-denominated loans soared from 33.4828 trillion won at the end of 2021 to 81.9577 trillion won as of March this year. Their total assets surged from 63.7180 trillion won to 142.4443 trillion won over the same period. The introduction of account transfer systems in 2015, full-scale open banking in 2019, and a loan transfer system in 2023 have all made it far easier for financial consumers to switch banks, further weakening the regional banks’ local customer base. Securing loyal local customers is no longer easy, forcing regional banks into direct competition with nationwide commercial banks.

Emerging Integration Debate...What Is the Survival Strategy for Regional Banks?

Amid signs of weakening competitiveness, calls for integration have emerged in the financial sector. Last month, Align Partners, through a letter to shareholders, proposed a merger between BNK Financial Group and JB Financial Group. They suggested a “union-type holding company merger” in which the legal entities of Busan, Kyongnam, Jeonbuk, and Kwangju Banks would be maintained, while only the holding companies would merge. According to Align Partners, a merger of the two financial groups would create a financial powerhouse with total assets of 234 trillion won, achieving economies of scale. Align Partners stated, "The business territories and portfolios of the two financial groups are complementary. This would create genuine competition against the commercial banks’ current oligopoly and is the only solution that can ensure the long-term survival of regional banks." However, both BNK Financial Group and JB Financial Group rejected the proposal, saying it was not the right time to consider a merger.

Many in the financial sector also see a merger as unrealistic, citing strong opposition from local communities and labor unions, as well as difficult issues such as determining the merger ratio and securing shareholder consent. Even with shareholder approval, regulatory approval from the financial authorities would still be required.

Nevertheless, some say that this proposal should prompt a serious exploration of ways to boost regional banks’ competitiveness. Seo Jiyong, professor of business administration at Sangmyung University, said, "Efforts to strengthen the competitiveness of regional banks should be divided between what they can do for themselves and what government support can accomplish. Since regional banks exist to help revive local economies, improving their competitiveness is key to supporting regional economic growth."

A financial industry official also stressed, "It is a fact that the regional banking business is getting more challenging. Because regional banks play a vital role in providing funding to local small and medium-sized businesses, boosting their competitiveness is essential to revitalizing the regional economy."

This content was produced with the assistance of AI translation services.