Why analysts are not surprised at foreign bank shutdowns in Korea

It reflects only one thing.

According to Fitch Ratings, recent branch shutdowns by foreign banks in Korea are not a surprise. They are a response to rising pressure on profitability on account of the changing retail banking landscape in the country.

The shifts in retail banking are brought on by high household debt, an ageing population and heightened competition within a maturing retail segment - amid a regulatory environment that is focused increasingly on consumer protection.

Here's more from Fitch Ratings:

The debt-service burden is likely to remain large enough to weigh on consumption demand for the foreseeable future, although the authorities have begun putting in place regulatory and administrative measures to provide some relief and limit a further, excessive pile-up of liabilities. The debt burden reached 164% of households' disposable income at end 2012 - which is one of the highest in the world. We think further increases in the household debt/income ratio are likely, and that much of this will be driven by lower-income households and self-employed individuals.

Ageing population dynamics are also weakening the appetite to lend. This is because of the paucity of younger - and less indebted - workers who have the capacity to take on new loans. Korea, with one of the lowest total fertility ratios in the world, is exhausting its demographic dividend, and this is likely to restrain the scope for a rejuvenation of high-quality consumer-lending opportunities any time soon.

No bank in Korea will remain completely unscathed by these structural challenges. But foreign banks, in particular, have faced greater pressure on profit, for two key reasons.

First is the lack of scale which has resulted from a cautious expansion strategy within a maturing and increasingly competitive retail banking sector. Foreign banks were slow to expand in the high-growth years of the last decade. Moreover, the level of competition in the retail segment from both local commercial banks and policy financial institutions has risen in recent years. These developments have limited their penetration of the domestic market.

The second reason is that regulatory measures are also now pressuring their margins in sub-prime areas where they have tried to take on more risk. Moreover, credit costs in this segment are on a rising trend as there are increasing cases of personal-debt rehabilitation and bankruptcy filings at the courts.

It makes sense for the foreign banks to redeploy their capital to take advantage of their parents' international wholesale and transactional banking networks. The action of the foreign banks is therefore not a surprise. The need for scale and the ability to differentiate will always be a challenge for any foreign entrant. But the structural financial and long-term demographic challenges in Korea make it less likely for foreign banks to redouble their efforts when faced with conditions that do not provide an appropriate return on capital.