A pedestrian walks past a Citibank branch in New York. Standard Chartered and Citigroup have seen their $6bn bet on South Korea turn sour in less than 10 years as the two banks struggle to sustain profits in an economy plagued by rising household debt.

Bloomberg

Seoul

Standard Chartered and Citigroup have seen their $6bn bet on South Korea turn sour in less than 10 years as the two banks struggle to sustain profits in an economy plagued by rising household debt.

Standard Chartered took a $1bn writedown on the value of its business in the country in August, a cost that’s set to end the London-based lender’s 11-year streak of record annual profits. At Citigroup, Korea will hurt revenue in Asia through 2014, Chief Financial Officer John Gerspach has said.

Korean lenders have seen their return on equity, a measure of profitability, shrink by more than half over the past decade when Standard Chartered and Citigroup first pledged the largest-ever foreign investment in the country’s financial industry. With the government stepping up efforts to curb household debt, foreign banks have been left seeking ways to cut costs.

“Banks will have to accept the new normal of low growth, low return on equity,” said Yoo Sang Ho, a Seoul-based banking analyst at HI Investment & Securities Co “They have to forget what they saw in the mid-2000s.”

Standard Chartered, Citigroup and HSBC Holdings first started competing for Korean banks after the economy and banking system rebounded from the 1990s Asian currency crisis that led to an International Monetary Fund bailout. In 2004, New York- based Citigroup trumped Standard Chartered to buy Koram Bank for about $2.7bn. The following year, Standard Chartered beat HSBC in acquiring Korea First Bank for $3.3bn.

Over the past five years, Korean economic growth slowed to 2.9% from an average 5.8% in the nine years through 2008, according to the IMF, as household debt swelled. At the same time, commercial banks saw their RoE slump to about 7.4% last year from 20.3% in 2005, according to data from the nation’s Financial Supervisory Service.

President Park Geun Hye, who took office in February, has pledged to ease consumer debt burdens by restructuring loans for low-income earners. The move follows measures already in place since 2006 limiting the amount people can borrow depending on their income and home values. In 2011, the financial regulator asked banks to provide more fixed-rate loans to reduce risks from increases in interest rates.

Bank lending rose 3.4% in 2012, the weakest since a drop of 0.1% in 1998 amid the Asian currency crisis, according to Bank of Korea data. Loan growth averaged 6.5% in the five years starting in 2008 after averaging about 17% in the previous nine years, the data show.

“Rules that limit household lending must have hammered profits at foreign banks who rely more on retail business than their domestic peers,” said Kim Hye Mi, a researcher at Seoul- based Hana Institute of Finance.