SEOUL, KOREA - The local units of Korean banks doing business in China are busy raising their allowance level for bad debts after the Chinese financial authorities mandated banks to increase the allowance up to 2.5 percent by 2016. Given most Korean banking corporations there have bad-debt allowance levels around 1 percent, they are in a bind to raise the level in stages.

 

Choi Man-kyu, head of the Woori Bank office in Beijing's Chaoyang District, said, "We are hard-pressed to make profit due to tightening regulation." But the more serious problem for the banks is excessive competition without differentiated services.

 

Beginning with Woori Bank that set up a local operation in November 2007 in China, a total of nine Korean banks have established their presence in the form of six local corporations and eight branch offices. Their profitability has of late deteriorated to a level of 23.4 billion won in profit in the first half of this year, down 64.5 percent from the same period a year ago of 66.1 billion won. The banks' profitability suffers more beginning in the third quarter. For example, Shinhan Bank's Chinese unit reported a loss of 7.5 billion won in the third quarter. 

 

The biggest reason for the declining profitability is attributed to the strengthened regulation. The Chinese government's measure to require all banks, regardless of their size or financial conditions, to meet the 2.5-percent bad-debt allowance requirement is squeezing the banks. Cho Young-shik, vice president of Shinhan Bank China, said, "Profit suffers if we put more money to the allowance account."

 

But critics said the Korean banks' complaints about regulation is just an excuse, given that most other Chinese banks are doing well under the exactly same regulation. The more important reason, they pointed out, for their worsening performance has more to do with the cookie cutter-style business practice chasing the same group of customers with branch offices in the same district.