Citigroup’s decision to withdraw from retail banking in South Korea has sparked concerns over the possibility of other global financial companies following suit.

Korea has nurtured ambitions to become Asia’s next financial hub for nearly 20 years, but in that time, the presence of foreign banks has not grown, but weakened. Citi’s choice of Korea as one of 13 markets to exit suggests that trend is continuing.

According to data published April 14 by Financial Hub Korea under the Financial Supervisory Service, the number of foreign banks’ branches and offices has been falling every year. As of end-December last year, the figure dropped further to 54, from 60 four years ago, excluding the retail branches of Citibank and UK multinational Standard Chartered.

Since 2017, five foreign brokerages, asset management houses and insurance firms have also left the country, it added.

The departure of foreign institutions in recent years appears to have been triggered by HSBC’s sale of its retail business here eight years ago, according to market experts. Royal Bank of Scotland left in 2015, followed by Barclays in 2017, while Goldman Sachs, UBS and Australia-based Macquarie have all reduced their presence in Korea. Global insurer ING withdrew its business from Korea in 2013, and UK-based Prudential Financial sold its local unit PCA Life Insurance to Mirae Asset in 2017. Paris-based AXA Group’s insurance operation in Korea has also been put up for sale.

Plummeting profits and rising costs have been cited as the main reasons for banks leaving the country, but the foreign exodus demonstrates how South Korea is losing its charm as a market for future growth -- and the nation’s strict regulations are to blame, experts say.

“Amid the ongoing low-rate environment, global financial companies have decided to withdraw businesses from less profitable nations. ... They commonly have stricter financial regulations and Korea has even tougher restraints among them,” said Kim Sang-bong, an economics professor at Hansung University, citing the Financial Services Commission’s involvement in banks’ dividend payouts.

High corporate tax is another reason, said Sung Tae-yoon, an economics professor at Yonsei University.

“Korea’s maximum corporate tax is too high compared to other Asian countries such as Singapore and Hong Kong. And there are plenty of stubborn financial regulations that make it difficult for financial firms to do business stably,” he said.

Regulators, however, still argue that the market is full of opportunity.

“We count on global financial companies to join in a new journey with us to mutual growth of the Korean economy and finance,” Financial Supervisory Service Gov. Yoon Suk-heun said in a keynote speech at FSS Speaks 2021 held online last week.

“If Korea successfully innovates its industry and economic structure through your cooperation, Korea will soon play a role as a leader in the green industry based on its strength in digitalization,” he said.

To convince foreign companies to stay, however, the government needs to review its entire strategy, which has barely changed for nearly two decades, according to Korea Institute of Finance. Citing London-based think tank Z/Yen Group’s latest survey’s results, Seoul ranked as the world’s 25th most influential financial center as of September last year, down 11 notches from 14th four years ago.

“Beginning with the governmental moves to create a financial hub in Northeast Asia in 2003, Korea has constantly promoted the financial center policy, but distinct improvement has not been made so far,” KIF researcher Suh Jeong-ho wrote in the report.

The government may have to highlight its strong IT infrastructure and its rapidly improving environment for data utilization in the post-pandemic era, he added. Construction of an extra engine test bed, in addition to robo-advisers and blockchain designations and strengthening the global cooperation network are some suggestions, he said.

By Jie Ye-eun (yeeun@heraldcorp.com)