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Foreign banks, ethos in
Korea
By Andrew Petty
SEOUL - After one of the world's largest
lenders, Standard Chartered, bought Korea First
Bank last month, the media was quick to foretell
of the coming "bank wars". The competition between
foreign and domestic banks has been dreaded ever
since South Korean banks sold their shares to
outsiders to bail out of the 1997-98 financial
crisis.
Kookmin Bank, Woori Bank, Hana
Bank and Shinhan Bank - the domestic giants -
still have a towering lead over their competitors,
Standard Chartered, Citibank, which began
acquiring KorAm Bank in April, and HSBC, which has
announced that it will bid for Korea Exchange Bank
in November. However, foreign banks are expected
to introduce a new level of expertise unknown here
that makes money management more efficient, and
roll out enticements such as higher interest rates
on deposits and lower rates on loans - offers that
domestic banks aren't ready to match.
Foreign banks have controlled a handful of
Korean corporations for four to five years, but
did little to advance the companies. Analysts say
banks gobbled by funds after the crisis were
fattened up to sell to the largest multinational
bidders. Newbridge Capital, a US private equity
fund, rescued Korea First Bank in 1999 by buying a
controlling 48.6% stake. Then, Korea First had a
loss of 1 trillion won ($960 million) but as of
last September, the bank was in safer territories
with 85.2 billion won in profits and total assets
of 47.1 trillion won. Newbridge made about $1
billion from the sale to Standard Chartered. It
was the largest of such acquisitions in Korea as
the shares were sold for 3.4 trillion won, or 1.87
times its book value. Typically, a bank is sold
for 1.2 times what it is worth.
The final
weeks leading to the January 10 sale were rather
dramatic as Standard Chartered did not make a bid
until December, several months after HSBC
expressed its desire to buy the bank. Reportedly,
HSBC was offering about 13,000 won per share, but
then Standard Chartered approached Korea First
with an offer of 16,511 won per share. US private
equity fund Lone Star bought a 51% controlling
stake of Korea Exchange Bank for $1.2 billion in
2003. HSBC has announced it will bid for the
shares in November when the "lock up" term ends.
Foreign banks now have a 21% chunk of the
Korean market, an Olympic leap from the 4% share
in 1997 and a dash from 15.5% in 2003. The 41
foreign companies' gross total assets in Korea now
amount to 270 trillion won. About 181 trillion won
of that money is shared by the three
foreign-controlled banks: KorAm Bank, Korea
Exchange Bank and Korea First Bank.
Korea
is by all means a hot market for finance. Analysts
expect a record 10 companies to post annual
earnings over 1 trillion won. This list includes
such newsmakers as Hyundai Motor, steel maker
POSCO, LG Philips Corp and SK Telecom Co. Samsung
Electronics has just reported profits of 10.8
trillion won. Even the domestic banks are seeing
record profits. Woori saw gains soar after
expanding its foreign exchange business and raking
in service charges.
But bank officials
admit that despite Korea's growth there isn't
enough cash to go around and in a few years, the
list of leading banks in Korea could become
shorter. Today, all the seven major banks are
looking for innovative ways to fill their pockets.
One of the battlegrounds is private banking. Woori
officials believe the private banking market will
grow to 200 trillion won in the near future, which
is why they plan to expand the number of offices
that offer private banking services from the
current 70 to 380 by the end of the year. Some
banks are opening new offices in upmarket areas to
catch wealthy customers. Hana will set up a branch
in the lobby of the five-star Grand
InterContinental Hotel and Shinhwa is beginning an
office in the legal neighborhood of the Seoul
District Court and the Seoul High Court.
Citibank and other recent takeovers lack
the funds from stocks to build more offices and
expand. Instead, they're looking to steal
customers away from the competition by offering
bargains and higher returns. Citibank arrived in
the market amid much celebration, rolling out the
"six weeks, six ways" promotion. Besides offering
higher interest rates on deposits and lower rates
on loans, they unveiled time deposits which would
give customers 4.5% returns annually, compared to
3.6% offered by competitors. "The name of the game
is not the number of branches and assets one has,
but how efficiently it manages customers' assets
and give returns," says analyst Kim Kyeong-won at
Samsung Economic Research Institute.
Kim
believes the domestic banks will adopt more
advanced practices and raise their standards to
keep up with the global giants, which will benefit
competition in Korea. But Korean banks will have
to pay a price for this efficiency that could come
in the form of trimming labor. The banking
industry - locally and everywhere - is
over-staffed and to reduce costs, some
restructuring will be required, he says. If
domestic companies lay off workers in Korea, they
typically face grueling labor strikes in which the
employees ask the government to step in. But if a
foreign company is doing the firing, unions have
less leverage.
For ages, Korea was known
as the "hermit kingdom" as it refused to open up
its borders to foreign trade and relations, unlike
Japan. The peninsula was invaded over and over by
outside forces throughout its history in which
treasured monuments were destroyed and populations
taken captive. Korea suffered as a colony of Japan
from 1910 to 1945, when many were forced to give
up their heritage and adopt Japanese culture.
Today, a cautious attitude toward foreign
investment still exists and local analysts worry
about the negative impact of the competition with
foreign banks.
Kim says that a company
like Citibank, with 4,000 branches across the
globe, won't be too badly hurt if disaster strikes
the local economy. It can either pull out, as US
businesses did years ago in Russia and other
troubled economies, or can keep the banks alive by
pumping in funds from the headquarters. Likewise,
if Citibank loses big in another economy,
executives may dip into the Korea till to bail
themselves out. Also, Citibank would not be
interested in expanding KorAm bank worldwide,
hurting the overseas growth potential for the
financial industry, says international economics
and finance professor Hahm Joon-ho of Yonsei
University. And it may not be too bothered with
improving services for small and medium-sized
businesses. "In general, the presence of foreign
banks can improve efficiency. But concerning
Korea's financial stability, there will be some
pros and cons," holds Hahm.
Andrew
Petty is a reporter for the Korea Herald and
freelancer at large covering business and
politics.
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