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Who Will Be the Final Leader?
Four major financial holding companies are in uphill battle vying for industry leader position
Who Will Be the Final Leader?
  • By matthew
  • June 10, 2011, 11:29
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According to recent date by the Financial Supervisory Service, the total assets of KB Financial Holdings amounted to 326.1 trillion won as of the end of last year. Woori Financial Group and Shinhan Financial Group are nipping at the heels with assets totaling approximately 326 trillion won and 309 trillion won, respectively. Hana Financial Group’s valuation will reach 311 trillion once it acquires Korea Exchange Bank and become the country’s third-largest financial company. As a result, all three are in a position to become market leader, with sales results likely to become the deciding factor.

“The financial holding companies are neck and neck in terms of asset under management (AUM) and their scrambling for the No.1 position will intensify down the road”, said Lee Byeong-yoon, a researcher at the Korea Institute of Finance in a recent report. Lee added, “A new megabank will be formed when Hana Financial Group is allowed to take over Korea Exchange Bank, making competition even fiercer.”

Towards the Same Goal

Under such circumstances, those at the helms of the three groups are bracing themselves. KB Chairman Euh Yoon-dae remarked during an interview recently that his group in 2011 will recover from the slump that haunted it last year. During his inauguration ceremony back in March, Shinhan Financial Group chairman Han Dong-woo stressed the urgency of winning back the glory, too. Meanwhile, Woori Chairman Lee Pal-seong stated, “We will round off the privatization issue without delay, renovating and strengthening ourselves.” Though the words are different, they have the same single undertone -- “Push forward and focus on sales.”

Such tension is also being felt at local commercial banks’ meetings. Despite their emphasis on the pursuit of sustainable and healthy management, none were able to hide their determination to pull ahead and come out victorious.

“This year, we will set new sales records and reclaim the top spot as the undisputed leader of the industry,” said Kookmin Bank CEO Min Byeong-deok. Kim Jeong-tae, his counterpart at Hana Bank, commented, “We will attract more customers so as to strengthen profitability because that is the most fundamental strategy for us to remain ahead.” Seo Jin-won, CEO of Shinhan Bank, remarked, “We will No.1 in the three segments of asset management, asset quality and retirement pension.”

Non-banking Business, Another Hot Button

In the meantime, financial holding companies are finding it difficult to diversify their sources of income, which lean heavily towards their banking arms. The local banking sector is already saturated and an industry reshuffle has just occurred. It is vital for them to make a breakthrough through portfolio adjustment.

In this vein, chairman Lee Pal Seong on May 1 during a ceremony to celebrate the 10th anniversary of his holding company, stated, “We will strive to strike a balance in our portfolio by investing more in our non-banking segments, such as insurance, asset management, credit card and consumer finance.” He continued, “I believe we can further enhance our profit structure by raising their market presence and competitiveness.”

Financial Big Bang Looming Large

The privatization of Woori Financial Group resumed when the Korea Deposit Insurance Corporation (KDIC), the group’s largest stockholder, disposed of its shares. Experts are claiming that the privatization process in the end hinges on how strong the new player to take over the group is.

With the financial big bang on the horizon, the government has set the stage well in favor of the market by setting each bidder’s minimum share purchase requirement at 30%. As a result, the odds are against minor contenders, with the upper hand being given to their larger counterparts. KDIC was in possession of 56.97% of Woori Financial Group’s stocks, worth over six trillion won. The successful bidder does not have to buy all of these, but must purchase approximately 30% in order to take control.

Industry insiders are forecasting that three scenarios are plausible -- Korea Development Bank (KDB) Group taking the sole lead, KDB and KB Financial Groups competing with each other, and numerous financial groups vying against each another. Those in the know are leaning to the first and the second scenarios.

KDB Group Holding Firm to its Principle

It seems that KDB Group has mulled over acquiring Woori Financial Group for years. In a report released by the Financial Services Commission in June 2008 regarding the privatization of KDB and the establishment of the Korea Development Fund, it was revealed that the privatization process does not rule out the possibility of a market-led, spontaneous M&A with another bank, and the similar processes for Woori Financial Group and Industrial Bank of Korea are to be in progress without delay.

KDB Group is considering throwing down the gauntlet after securing funds by various means, including internal financing, corporate and convertible bonds, and the issuing of preferred stocks. The only roadblock is that there has been no precedent regarding M&A between financial holding companies. As such, it is likely that KDB Group will act with utmost prudence until the last minute in deciding whether to participate or not.

In the meantime, the government is poised to amend the enforcement ordinances of the Financial Holding Company Act. This will involve lowering the minimum share purchase requirement for a financial holding company to acquire another from the current 95%. Then, KDB Group may take over Woori in the form of anintermediate holding company for a while.

KB Financial Holdings Still Standing

With the situation as it is, KB Financial Group Chairman Euh Yoon-dae is on pins and needles. He recently remarked that a merger between KDB and Woori would create a financial giant, with assets amounting to no less than 505 trillion won, significantly more than KB’s 344 trillion, and therefore threatening KB’s industry leading position. Experts are highlighting that KB Financial Group will then have enough reason to retract its former statement regarding its non-participation in the M&A battle.

Furthermore, the May 17 announcement by the Public Fund Oversight Committee was well-timed for KB. According to the Committee, the memorandum of understanding regarding the management of Woori Financial Group may be subject to compromise or cancellation with the approval of the committee, even if the Korea Deposit Insurance Corporation (KDIC) becomes the largest shareholder through M&A. The provision means that management will be handed over to the acquirer even though the KDIC turns itself into the top stockholder. This would undoubtedly ease chairman Euh’s concerns regarding the No.1 position.

However, KB is remaining on its original tack of non-participation. “If no profit is guaranteed, why do I have to jump in?” Chairman Euh said in November last year, maintaining the stance ever since.

Woori Financial Group Struggling to Stand on its Own Two Feet

Under such circumstances, industry insiders are saying that the independent survival of Woori is no longer an option. The holding company tried to acquire KDIC’s shares last year by forming a consortium. However, under current law, a consortium is regarded as non-financial if one or more non-financial business operators or industrial capitals are included. As a result, the consortium is unable to take over the management of Woori, in accordance with the principle of separation of banking and commerce. The consortium formed by Woori included numerous industrial capitals such as POSCO and KT, and consequently Woori cannot quire the stakes of the KDIC even when the latter is willing to sell out its shares.Nevertheless, Woori is not giving up on its management independence, and continues to search for ways around these regulations and stand on its own feet again.