Signs of a ‘financial big bang’ are becoming visible in Korea’s banking industry. The industry is facing a new transition, with major changes being instigated by financial authorities in addition to large-scale unfavorable factors in the global finance industry. With the G20 summit approaching, policy makers are repeatedly expressing their will to restructure the domestic banking industry, which is leading to tensions.
As a result of these expected changes, individual banks are preparing diverse strategic portfolios in regards to scaling up, differentiation, profit diversification, and internationalization. Up until recently, the emergence of extra-large banks, referred to as ‘mega banks’ was the key issue in the banking industry. However, experts are now saying that this trend is already on the decline.
The theory of mega banks was suggested by Woori Finance Group a concept to create champion banks that specialized in corporate financing based on an association of government-owned banks, including Woori Bank, Korea Development Bank, and Industrial Bank of Korea. The mega bank discussion became popular for a while, but as time went on focus turned to the process of how domestic banks could effectively scale up prior to independent M&As in order to become globally competitive.
Fierce competition to lead restructuring of the banking industry
While the privatization of Woori Bank is being pursued, the competition to take the lead in the restructuring banking industry is also gaining attention. Early last year, Kang Chung-won, CEO and President of Kookmin Bank maintained that the bank should take the leading role in order for mega banks to be realized. Lee Pal-sung, President of Woori Finance Group, during celebrations to mark the company’s 9th anniversary, responded by saying that Woori must take the lead in privatization and restructuring.
He also emphasized that the bank would actively promote global strategies for profit diversification, adding “we will promote progressive globalization strategies in order to overcome growth limits in the saturated domestic market and generate profits consistently.” He went on to say, “It is also necessary to strengthen our local capacity through strategic alliances and M&As with local finance companies in addition to thorough localization strategies. We must actively cope with strengthened global financial regulations.”
Meanwhile, Kang Chung-won, who kept a low profile due to problems with the Presidential election last year, spoke openly at a regular morning meeting held in their headquarters in Yeouido, Seoul, saying, “In the event that mega banks are realized so as to create another leap forward for Korea’s banking industry, Kookmin Bank must take a leading role.”
“We will be able to become a global leading bank by wisely overcoming the current growing pains,” Kang said, adding “I believe that we will be always smiling during the expected fierce competition among banks.”
While the two major Goliaths are at odds over the issue of mega banks, Korean banks are also promoting diverse management strategies in regards to scaling up, differentiation, globalization, and localization as part of their efforts to cope with the government’s plans to restructure the banking industry and challenges in the domestic and international financial environments.
Meanwhile, there are those in the industry who believe that differentiation as well as scale-up through M&A is a better alternative in regards to increasing the competitiveness, survival, and successful management of domestic banks.
In addition, the sector’s interest in using foreign financial companies as a benchmark for maintaining a surplus during a global financial crisis is growing.
Establishing a surplus trend
Banks are busy conducting strategies aimed at long-term profits, stability, and growth as well as establishing surplus trends.
For example, based on the recent low interest rate trends, banks are promoting non-interest based sales in search of their ‘prey.’ This has helped the reassured sales of funds and bancassurance which had slowed following strengthened regulations regarding the sales of investment products brought about by the implementation of the Capital Market Act.
However, in terms of finance policies, the issue of commercial banks and investment banks integrating is faltering. The maintenance to completely break down the boundary between the two is gone now. Recently, President Lee Myung-bak emphasized original functions of the finance sector to support industries. While the position emphasizing synergies of both is in decline, finance experts are saying that this has not completely lost its allies.
“The major financial issues are beginning to follow the framework of international discussions which have completely changed after the global crisis,” said an industry insider.
President Lee, during a luncheon with financial figures earlier this month, said, “We could not take away umbrellas on a rainy day, but now the sun is becoming visible little by little,” revealing his desire for the financial industry to undertake corporate restructuring. President Lee also showed his awareness of the criticism that the process of overcoming the global crisis is only benefiting large corporations.
“Finance must stay true to its original function, that of supporting industrial development,” he said.
Furthermore, there was a maintenance from the industry after winning an order for the construction of nuclear power plants in the UAE, that “there must be banks capable of providing capital for companies’ international business.” International extension along with the industry is a main theme to the extent that recently, the finance authorities will study and provide detailed plans.
On the other hand, the sector’s industry in the model of investment banks seems to be dwindling. As can be seen from the example of Korea Development Bank giving up its proposed take over of Siam Bank of Thailand in early February, there are many critics of integration of commercial and investment banks in the sector. In regards to this trend, an employee in the banking industry remarked, “Based on human networks overseeing finance, it must be noticed that now is quite different from the early stage of this government.”
“Competitiveness rather than size”
The compromise as to the sector’s restructuring and directions is consistently available, that “both scale-up and independent competitiveness are necessary.” Especially, the changes of the position of authorities can be interpreted in two ways. Firstly, it is an emphasis of competitiveness over scaling up.
Even Kang Man-su, Special Advisor to the President for Economy and the source of the theory of mega banks, recently said, “we need an overall review of the financial development model prior to the global crisis.”
The position of Jin Dong-soo, Chairman of the Financial Services Commission, is not very different, with him quoted as saying in regards to mega banks, “competitiveness shall come before size.”
Another change in the authorities is the belief that scaling up through M&A should be done by the market itself. This is not unrelated to Jin’s saying as to privatization of Woori Finance Group that “this may take place after the end of the year.”
Kim Seung-yoo, President of Hana Financial Group, recently said as to the recent big bang of banks, “I could feel that the atmosphere was changing from earlier this year.” However, the Financial Services Commission is sticking to its original position to finish carrying out the official sales processes.