Overseas Financial Business
In July 2002, KB Kookmin Bank ranked 70th in the Top 1000 World Banks list compiled by The Banker. This was based on an asset size of US$119.45 billion at the end of 2001. After the old Kookmin Bank and Housing & Commercial Bank merged, it became the first Korean bank to enter the Top 100 list.
Eleven years later, at end of 2012, KB Financial Group (Kookmin Bank) has dropped to 88th place by asset size. It is still ranked 68th by tier 1 capital, but not much has changed since ten years ago.
The Korean financial industry has fallen behind in international market competitiveness. Experts point out that this result is a combination of Korean banks’ fundamental limitations and the financial supervisory authorities who have focused on short-term issues without seeing the big picture. Financial companies have enjoyed running the interest business at home, while neglecting the exploration of foreign markets.
Promising “Samsung of Financial Industry” without Resolving Fundamental Limitations
Why can’t Korea raise a global corporation such as Samsung Electronics and Hyundai Motor in the financial industry? The answer is simple. The financial industry is the most regulated industry anywhere in the world. Not only are the financially-advanced US and EU highly regulated, even emerging economies are building walls to regulate the financial industry.
China has introduced strict loan-deposit ratio regulations to restrict the growth of foreign financial companies. Countries such as Indonesia and Vietnam have put a cap on the amount of stock a foreign corporation can own, and are looking to fortify these regulations. In particular, banks can serve as a lifeline to the country’s industry and are not up for sale unless in serious financial crisis. Korea First Bank and Korea Exchange Bank were sold to foreign capital only at the peak of the 1997 financial crisis. As for Citigroup, Citibank, which is a minor bank in Korea, is actually running the third-largest operation in the domestic market for its global retail banking, following those in the US and Mexico. This shows how difficult it is for a bank to run operations abroad.
Korean banks have relatively low credit ratings compared to American or British banks. It is usually difficult for individual bank credit ratings to surpass country credit ratings. Due to geopolitical risks, Korea tends to be relatively undervalued. The financial crisis in Europe has changed things, but fundamentally Korean banks have higher foreign currency procurement interest compared to the US or Japan. This is the reason that Korean banks fall behind in project financing (PF) abroad.
Korean banks also have limited networks abroad. Korea Exchange Bank, which has the highest number of foreign branches among domestic banks, has 54 branches in 23 countries. HSBC in comparison has 6,600 branches in 80 countries in Europe, Asia, Central and South America, Africa, and the Middle East. Citigroup has branches in 160 countries, and its profits in Latin America and Asia accounted for 21% of total profits each, while profits in Europe, the Middle East, and Africa accounted for 16%. International corporations such as Samsung and Hyundai that export and sell across the globe can find dealing with domestic banks troublesome. Furthermore, Korean banks have limited experience in foreign investment, making it even harder for corporations to find financial companies to invest in power plants or major construction PF in Southeast Asia or South America.
Entering foreign markets is indeed difficult for Korean banks. Nevertheless, experts point out that neglecting possibilities altogether is not the optimal solution. Financial supervisory authorities that are meant to build the industry have only focused on short-term issues without seeing the big picture for expansion abroad. Financial Services Commission Chairman Shin Je-yoon has promised a way to lead the Korean wave in the financial industry, but many point out that his proposals do not differ much from other efforts in the past.
Without a big picture by the authorities, discussions such as the effectiveness of financial holding groups and road map for the Korean banking industry have lost priority. In effect, financial companies are not actively seeking business abroad with a long-term perspective.