More interbank consolidations between banking institutions will unfold in the Asia-Pacific region to achieve cost efficiency through economies of scale, and South Korean banks are not exceptions to the “existential choice,” according to a recent regional report by McKinsey & Co.

The report, “Asia-Pacific Banking Review 2019 Bracing for consolidation: The quest for scale,” highlighted large Korean banks’ need to achieve greater economies of scale as slower growth in China leads to interbank consolidation in APAC.

“What many Asia-Pacific markets have in common is significant dependence on trade with China,” the report noted.

“The tapering of China’s real GDP growth, from 7.9 percent in 2012 to 6.7 percent in 2018 will contribute to weakening demand for banking services across the region.”

The combination of slowing growth, increasing competition, and the potential for further increase in risk costs creates a perfect storm, so banks will be severely challenged, the report added.

As the Korean market is highly fragmented, its leading banking entities are likely to pursue such consolidation. McKinsey said citing data by SNL, which indicated that as of 2018, the four largest banks have evenly taken a 13-14 percent market share by assets, while those of others accounted for a combined 46 percent.

“Larger, highly efficient banks seek greater (economies of) scale to ride the new wave of productivity,” read the report. “As well-capitalized banks with strong market valuations explore their options for improving productivity, many will likely seek to acquire less efficient and poorly capitalized banks.”

This is expected to come regardless of solid earnings of Korean banks.

Korea has seen increased banking return-on-equity, from 4.5 percent in 2014 to 8.5 percent in 2018, mainly due to higher capital, greater cost efficiencies and lower risk costs. This bucks a downward trend in most developed Asia-Pacific markets, according to McKinsey.

Moreover, Korea is leading the digital revolution in Asia with a 99 percent adoption rate, as well as deregulation toward the innovation, which in part gave birth to Kakao bank, an internet-only bank that has accumulated 8 million users and 12.1 trillion won ($10.4 billion) transactions within 18 months since its launch in 2017.

By Son Ji-hyoung (consnow@heraldcorp.com)