Banks Brace for Fierce Bidding for Seoul, Incheon and Other Local Government Depository Deals

Local governments’ depository contracts are emerging as a major battleground for South Korea’s banks, with competition expected to intensify as several large jurisdictions near the end of their current agreements.

According to the financial industry on April 14, five governments — Seoul, Incheon, Sejong City, South Jeolla Province and North Gyeongsang Province — will see their depository agreements with banks expire at the end of December.

Shinhan Bank currently handles Seoul’s first and second depositories. Incheon’s first and second depositories are managed by Shinhan Bank and NH NongHyup Bank, respectively. Sejong City uses NongHyup and Hana Bank; South Jeolla uses NongHyup Bank and Gwangju Bank; and North Gyeongsang uses NongHyup Bank and iM Bank.

Seoul is widely viewed as the biggest prize, given its budget size and the prestige of being the city’s main banking partner. Seoul’s total budget this year (general account plus other special accounts) is 51.4778 trillion won, the largest among local governments nationwide.

Other banks are signaling strong interest in unseating Shinhan. All five major commercial banks, including Shinhan, attended a proposal briefing held April 9, according to industry officials. Seoul plans to accept proposals through May 6 and then hold presentations by each bank.

A revised scoring system could further sharpen the contest. The weighting for interest rates on demand deposits has been increased to 8 points from 6, raising expectations of more aggressive rate offers.

Incheon, with a depository of about 15 trillion won, is also expected to be closely contested. The city plans to begin preparing its bid process in June and aims to sign an agreement as early as July. While Shinhan and NongHyup currently serve as depository banks, Hana Bank — which is set to relocate its headquarters to Incheon’s Cheongna International City in September — is emerging as a leading challenger. Analysts say interest rates could be decisive as Incheon pushes an ordinance change that would require rates to be disclosed within 30 days after a depository agreement takes effect.

Outside the capital region, competition is also expected for Sejong, South Jeolla and North Gyeongsang. Their budgets this year total more than 28 trillion won: North Gyeongsang at 14.0363 trillion won, South Jeolla at 12.7023 trillion won and Sejong at 2.0829 trillion won.

Banks pursue these contracts largely because managing public funds can secure large volumes of low-cost deposits. The average interest rate paid on local government depository funds nationwide last year was 2.53%, according to the Interior and Safety Ministry’s Local Finance Integrated Disclosure System released in January. The contracts are also seen as valuable for reputation.

“A city or provincial depository carries symbolic value, but it also delivers substantial practical benefits in areas such as corporate and investment banking,” a financial industry official said. “With some evaluation criteria adjusted and disclosure of contracted rates becoming mandatory, strategic competition among banks is likely to grow even more intense.”