Daegu Bank bets long-term with digital amidst home market issues

The Korean bank has turned its eyes to Seoul to grow its retail banking activities.

Daegu Bank’s digital investments and growing retail banking activities in Seoul is a positive move, but ongoing home market challenges will weigh on the bank in the near-term.

The bank has been investing heavily in digitalisation and its online banking app, via which Daegu Bank has been growing its lending and deposits from Seoul and the metropolitan area, noted Moody’s Ratings.

Daegu Bank has notably floated plans to rebrand itself as iM Bank and expand its presence in Seoul by growing its lending to medium credit risk customers. Currently, Daegu Bank has also applied for a nationwide commercial bank license, with their application currently under review by the Financial Services Commission. 

Moody’s Ratings said that the rebranding may be a credit positive in the long term if it reduces its regional and sectoral concentration.

However, it won’t solve current problems it faces from its home market. 

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Daegu Bank had predominantly operated in Daegu City, where the contraction of the textile sector, population outflow, and high housing vacancies has led to slower economic growth compared to the rest of South Korea.

Daegu Bank's asset quality has deteriorated, with its problem loans to gross loans rising to 0.88% as of 31 December 2023 from 0.58% as of 31 December 2020.

Another key challenge Daegu Bank faces in its digitalisation efforts is rising costs.

“Moody's expects near-term pressure on profitability because the bank's digitalization efforts and pivot to a nationwide business will entail investments in hiring and marketing, which will likely increase its cost-to-income ratio,” the ratings agency said in a report, where it affirmed the bank’s A2 foreign-currency and local-currency long-term bank deposit ratings and changed their outlooks to negative from stable.

Moody's said that it could change the outlook back to stable if the bank successfully executes its strategy and lowers its regional and sectoral concentration without a material increase in asset risk.