President Cho Yong-byung of Shihan Bank. (Photo: Shihan Bank)

A mid low growth and low interest rates, the country's banking industry is suffering from poor profitability. Shinhan Financial Group, however, is finding business overseas based on the belief that globalization will enhance customer and shareholder value.

The country's banking industry has been seeing weakening growth. The average return on assets (ROA) of local banks fell to the 0.2 percent range, while net interest margin (NIM) fell to around 1.8 percent. 

The outlook for the future isn't bright when considering the rapid aging of the population and low birthrate.

To sustain growth, banks are looking for opportunities overseas. The NIMs in Indonesia, Mexico and the Philippines, which Korean banks are eyeing, are more than double that in Korea. Most emerging markets have a relatively high ROA and return on equity (ROE), while the penetration of banks is still relatively low.

While local banks are in the initial stages of globalization, Shinhan Bank has been making meaningful small steps in its globalization efforts for some time. It currently has 153 branches or offices in 19 countries, expanding from international financial hub countries to emerging economies in Asia.

On top of its expanding network, Shinhan has been marking qualitative growth. Shinhan Bank's loans globally increased by around 100 percent from 2010 to 2015, and the global business provided over 10 percent of the bank's profitability last year, up from 2 percent five years earlier.

Shinhan Bank's operation in Vietnam is an example of a successful model for Korean banks’ globalization efforts. It has been making around 40 billion won net profit annually, on successful localization and synergy created jointly with its credit card arm.

Shinhan has focused on "localization" combined with globalization. It tries to provide products and services tailored for customers of each region while changing its operations to suit local businesses. Thanks to its efforts, local customers comprise 79 percent of Shinhan's global operations, while Korean businesses operating overseas are still major customers for other banks.

When advancing into markets overseas, Shinhan tries to set a balanced portfolio by combining retail banking with other businesses. In Hong Kong, Shinhan not only has retail but also corporate and industrial banking, financial investment and asset management, thus creating synergy.

To expand customer coverage, Shinhan is continuing to expand its network. It is preparing to enter Mexico and Australia while expanding its branches and offices in Vietnam and China.

Shinhan was awarded a banking license from Myanmar's central bank in March, the first among Korean lenders. It plans to start operations in Myanmar in 2017.

"Shinhan will continue looking for new growth engines in the global market. On top of seeking opportunities in emerging markets with huge growth potential, we will look for balanced growth in advanced markets such as the United States and Europe that are less volatile. The balanced portfolio will minimize losses in times of financial crisis," said a spokesman for Shinhan.

"Growth in the global market will enhance value for customers and shareholders," he added.

Shinhan Bank, the nation's second largest lender by assets, was the most profitable in the sector in 2015, with its per-person net profit hitting the highest among six institutions — the others being Kookmin, Woori, Hana, Korea Exchange Bank (KEB) and the Industrial Bank of Korea (IBK).

According to data from each bank, 81,977 employees at the six lenders generated a total of 5.23 trillion won ($3.74 billion) in net profits in 2008, 64 million won per employee. By bank, Shinhan's per person profit reached 111.54 million won last year, the highest among the six, with 12,970 employees generating 1.45 trillion won in net profits. KEB ranked second with per person income of 102.14 million won, followed by IBK with 81.39 million won and Kookmin with 58.22 million won, down sharply from the previous year's 130 million won and 102.9 million won, respectively. Hana Bank posted per person income of 43.72 million won.

Woori Bank showed the worst profitability, with its per person profit falling to 15.67 million won, the lowest among local lenders, due to mounting losses from its overseas investments.

Two regional banks — Kyongnam and Kwangju — recorded per person income of 97.72 million won and 63.55 million won, respectively, above the average of the six commercial lend

The profitability gap between lenders has widened sharply as some banks had to set aside huge amounts of loan-loss provisions due to growing deficits caused by the prolonged economic slump.

Woori has set aside 1.04 trillion won in provisions for loan losses associated with its overseas investments in credit default swaps (CDS) and collateral debt obligations (CDO) last year alone. It also put aside 1.6 trillion won in loss reserves for loans to construction firms and shipbuilders.