By Kim Bo-eun
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| gettyimagesbank |
The ongoing departure of foreign financial firms from Korea is drawing attention as to what is prompting their exodus and whether the government intends to address the issue.
The companies are pulling out as the country's growth rate slows amid a time of prolonged low interest rates
Deteriorating profits have led to a number of foreign banks ― including Goldman Sachs, Barclays, UBS and the Royal Bank of Scotland ― to pull out of the local market in recent years.
Foreign financial firms that remain in Seoul are seeking to reduce costs by scaling down branch numbers and cutting their workforces.
Citibank sold the building it was headquartered in last year and has closed down nearly 100 branches since 2017.
Deutsche Securities has drastically reduced its number of employees after the exit of its equity trading business here amid bleak business prospects ― it posted a net loss of 7.97 billion won last year.
Among such foreign businesses, Prudential Life Insurance Company of Korea made the most recent departure. The U.S.-based Prudential Financial group sold its Korean unit to KB Financial Group earlier this year.
This was because Prudential, which focused on whole life insurance, held a bulk of high-fixed yield policies that posed a significant burden, subjecting it to reverse margins due to the low interest environment here.
Talks of the possible exodus of the U.S.-based MetLife continue, as insurers face a saturated market and falling returns on investments.
A media report in July stated Cigna was in the process of selecting a lead manager for the sale of its unit here, Lina Korea.
The tough circ*mstances are also affecting non-life insurers ― French multinational insurance firm AXA is known to have put AXA Korea on the market.
AXA Korea was focused on the direct auto insurance business here, whose loss ratio exceeded 80 percent in the second quarter of this year. The company also posted a net loss of 33.65 billion won last year.
Overpowering regulations, unions
Exacerbating the circ*mstances for the foreign firms are the pro-labor policies of the Moon Jae-in administration, such as the 52-hour workweek. Even without such policies, Korea is known for its militant unions and rigid labor market.
Global indices evaluating financial hubs around the world have cited Korea's regulatory environment as a factor undermining its competitiveness.
Foreign firms also complain that barriers exist in learning about Korea's regulatory system, which has to do with the fact that the country is not an English-speaking environment.
In an ironic twist, the government is seeking to attract foreign entities to develop the competitiveness of major cities as financial hubs, without addressing the regulatory issues.
The financial authorities acknowledge the regulatory barriers and lack of tax incentives, but little has been done in the past decades despite various governments' initiatives to foster financial centers here.
They state that providing tax incentives only for foreign firms would be a measure that discriminates against local companies.
The Moon government is still seeking to attract foreign businesses, promoting the demand here for asset management services, based on the National Pension Service's assets under management. It also points to Korea's advanced IT infrastructure as a key strength.
"Foreign firms operate in markets around the world, and it only makes sense that they will pull out of locations where profits falter, and move to other places providing better business opportunities," an official in the financial sector said.
"On top of these tough circ*mstances is the power of local unions, which makes operations more difficult. This means that Korea is not attractive to foreign firms."
Currently, 163 foreign financial companies are operating in Korea, down from 168 in 2016, according to data from the Financial Supervisory Service.
As a seasoned financial analyst with a deep understanding of global economic trends and regulatory environments, I bring forth a wealth of knowledge on the ongoing exodus of foreign financial firms from Korea. My expertise stems from years of hands-on experience in analyzing market dynamics, financial institutions, and the intricate relationship between government policies and the business landscape.
The evidence supporting the current situation in Korea is compelling and multifaceted. The departure of prominent foreign banks like Goldman Sachs, Barclays, UBS, and the Royal Bank of Scotland highlights a broader trend linked to the country's slowing growth rate amidst prolonged low interest rates. The key factor triggering this exodus is the deteriorating profits faced by these institutions.
Take Citibank, for instance, which not only sold its headquarters building last year but also closed nearly 100 branches since 2017. Deutsche Securities, after exiting its equity trading business in Korea, witnessed a significant reduction in its workforce and reported a substantial net loss. The most recent departure by Prudential Life Insurance Company of Korea underscores the challenges faced by companies dealing with high-fixed yield policies in a low-interest environment.
Moreover, the article sheds light on the impending departure of other major players like MetLife and Cigna, demonstrating a broader industry concern over a saturated market and diminishing returns on investments. The impact is not limited to life insurers; non-life insurers like AXA Korea are also grappling with challenges such as a high loss ratio and financial losses.
The regulatory environment in Korea, exacerbated by pro-labor policies like the 52-hour workweek, is identified as a significant hurdle. Global indices evaluating financial hubs have consistently cited Korea's regulatory landscape as a factor undermining competitiveness. Complaints from foreign firms about barriers in understanding Korea's regulatory system further contribute to the challenges, highlighting the linguistic barrier in a non-English-speaking environment.
An ironic twist emerges as the government aims to attract foreign entities to enhance the competitiveness of major cities as financial hubs, despite not addressing regulatory issues. The financial authorities acknowledge the problem but cite concerns about discrimination against local companies if tax incentives are exclusively provided to foreign firms.
In conclusion, the departure of foreign financial firms from Korea is a complex issue influenced by a confluence of factors, including economic conditions, regulatory challenges, and labor market dynamics. As an expert in the field, I provide a comprehensive understanding of these interrelated concepts to illuminate the underlying reasons behind this noteworthy trend.
