[Regional Banks' Counterattack] ③ City Banks and Internet Banks Sandwich: "Strength in Relationship Banking"

Regional Economic Downturn Accelerates Capital Region Competition
“Relational Finance - Targeting Niche Markets”

[Asia Economy Reporter Yu Je-hoon] The reason regional banks are accelerating their expansion into the Seoul metropolitan area is paradoxically because the situation in their home regions is not favorable. As key industries falter, local economies are falling into recession, and with populations declining, these banks are making a ‘migration to the capital’ for survival.

Experts advise that, since not only established commercial banks but also emerging internet-only banks are expanding into the mid-interest and corporate loan markets, regional banks need to leverage their unique strengths in the highly competitive metropolitan market.

[Image source=Yonhap News]

Growth Rate Declines and Population Drops Sharply

According to Statistics Korea, the nationwide Gross Regional Domestic Product (GRDP) growth rate was 4.2% as of 2021. In the metropolitan area, excluding Seoul (3.5%), Incheon (6.0%) and Gyeonggi (5.7%) both exceeded the national average. Other regions with relatively high growth rates such as Sejong (7.2%), Chungbuk (6.4%), and Chungnam (4.6%) were all local governments adjacent to the metropolitan area.

On the other hand, the growth rates in the base regions where major regional financial holding companies are located were below average. Busan (2.3%), Gwangju (4.0%), Ulsan (3.7%), Jeonbuk (2.6%), Jeonnam (2.7%), Gyeongbuk (3.5%), and Gyeongnam (1.9%) mostly fell short of the national average. Daegu (4.4%) was the only region to exceed the national average. This explains why regional banks have no choice but to strengthen their expansion into the metropolitan area.

The population outlook is also bleak. Despite severe low birth rates, the metropolitan area showed relatively better figures as of 2022, with Incheon (0.14%) and Gyeonggi (0.86%) showing positive trends except for Seoul (-1.77%). However, regions such as Busan (-1.24%), Daegu (-1.37%), Ulsan (-1.34%), Gwangju (-0.60%), Gyeongbuk (-1.18%), Jeonnam (-0.99%), and Jeonbuk (-0.90%) are gradually worsening.

A representative from a regional financial institution said, "Recently, it is true that the growth of key industries has slowed not only in the Honam region, which has a weak industrial base, but also in the Yeongnam region," adding, "Regional banks expanding their networks into the metropolitan area and attempting to acquire overseas financial firms are survival strategies under these circumstances."

Challenges from Dominant Commercial Banks and Internet Banks: "Leverage Your Strengths"

However, expansion into the metropolitan area is not all rosy. The existing loan market is dominated by commercial banks, and with mobile financial transactions becoming widespread, internet-only banks have emerged as competitors. In particular, internet-only banks have recently been rapidly expanding their presence in the mid-interest loan market, which some regional banks have focused on developing.

Within the financial sector, it is expected that internet-only banks, which currently handle loans mainly for small business owners and self-employed individuals, will also expand into the corporate loan market. This poses a significant threat to regional banks targeting the niche in the corporate credit market left by commercial banks.

A representative from Bank B said, “Internet-only banks will likely enter the corporate loan market in the mid to long term, beyond mid-interest and small business loans,” expressing concern that “strong competitors are emerging in terms of accessibility and brand recognition, competing over a limited pie.”

Experts advise that to avoid being outpaced in competition with commercial banks and internet-only banks following their metropolitan expansion, regional banks must capitalize on their own ‘strengths.’

For example, regional banks can target niche markets between commercial banks, which have established dominance in the metropolitan area, and secondary financial institutions, while forming an advantage over internet-only banks, which lack branch networks, through ‘relationship banking.’ Relationship banking refers to providing long-term loans, equity investments, and management consulting by comprehensively assessing not only quantitative information but also qualitative factors such as growth potential, even when credit ratings are low or collateral is insufficient.

Lee Byung-yoon, Senior Research Fellow at the Korea Institute of Finance, stated, “Compared to internet-only banks that have no branches and must rely on data, regional banks have their own branch networks and personal networks such as expatriates who have moved to the capital, albeit limited compared to their bases,” adding, “Since understanding the information and potential hidden behind quantitative indicators is a strength of regional finance, a strategy to expand this advantage is necessary.”