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Latest rumors of potential divestment proposals by Citigroup for its South Korean subsidiary, as well as its other Asian-Pacific consumer divisions, shed light on how international banks are losing their position in the local market.

Over the last decade, many foreign banks have either withdrawn from the Korean market or scaled down their business. British investment firm Barclays pulled out after 39 years in 2017, following a decision by fellow UK lender HSBC to stop its retail banking services here in 2013.

The COVID-19 pandemic is expected to intensify the exit of international banks as Korean clients become more familiar with mobile financial services developed by local fintech firms such as Kakao Bank, according to an analyst.

“The digital acceleration of the local banking sector here, along with the Korean government’s strong regulations on dividends and household loans, have recently worked as disadvantages to foreign banks operating here,” Choi Jung-wook, an analyst at Hana Financial Investment, told The Korea Herald via phone on Monday.

“Household loans alongside wealth management and corporate lending have been a main revenue source for foreign banks, but it’s not as lucrative anymore,” he said. Outstanding loans held by Citibank have shrunk noticeably in the last 10 years, while the four major Korean banks — KB Kookmin, Shinhan, Woori and Hana — saw growth, he added.

As Choi said, household loans, despite remaining a key source of revenue for international banks, have not grown as large, with lender heads operating here highlighting wealth management and corporate banking in their recent vows.

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Although consumers appear to lose confidence in doing business with international banks, Korea is still struggling to be seen as a profitable market for lenders.

Citibank Korea and Standard Chartered Bank Korea have become the pair that has made the most effort to respond to the market, but both have closed down a large number of brick-and-mortar branches in recent years, suggesting downsizing.

The government has been encouraging banks to follow tighter loan regulations, causing harm to all banks in this region. Global banking companies have the option of offsetting them with profits from their non banking divisions, such as brokerages, but not international lenders.

On top of that, the government has recently “requested” that banks cap their dividend dividends to 20% of profits—something international banks have demonstrated obvious reluctance to do.

On Monday afternoon, the Chairman of the Financial Services Commission, Eun Sung-soo, told reporters that the financial authorities would review steps to lure international financial institutions, while acknowledging that foreign companies were exiting the market. The chief financial officer said attracting foreign firms was all about “business models,” suggesting that Korea needs to improve its system.

The downsizing and closure of international banks’ activities in Korea also points at a change in the global financial industry. Citibank was considered a key contributor to the first currency swap deal between Korea and the United States in the 2008 global financial crisis, with some viewers viewing the bank as a “financial diplomat.”

But now, obviously, it’s just about digitization and sales, industry analysts claim.

Citibank Korea—-after 54 years of service here—now either faces more downsizing and a revision of its business or even a possible sell-off to a local institution here, they said.

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Incoming CEO Jane Fraser has a track record of selling underperforming retail banking and credit card activities in Brazil, Argentina, and Colombia within a year of leading Latin America in 2015.

Citibank Korea’s cumulative net profit in the period January-September last year dropped by 38% year-on-year to 161 billion won ($145.5 million).

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