Korea’s banks want to shine overseas
Korea’s big lenders are striking out properly for the first time, buying assets and opening branches across southeast Asia. With their home market saturated, they have little choice but to travel in hope. But will that be enough?
In economic terms at least, east Asia is a remarkably homogeneous place. It’s a region dominated by industrial conglomerates: some state-run, others family-owned affairs, often sprawling across multiple sectors.
Wherever they go – and the biggest of this ilk are found everywhere – the country’s big domestic lenders go too, providing a world of corporate and investment banking advice. Except in one place. Since the millennium, Korea’s conglomerates – known as chaebol – have become global brands in their own right.
LG and Samsung in electronics, Kia and Hyundai in automobiles, Posco in steel. If this quintet of corporate heavies hailed from Beijing or Tokyo, they would be shadowed constantly by the likes of Industrial and Commercial Bank of China and Bank of Tokyo-Mitsubishi UFJ.
But try to remember the last time you heard these lenders mentioned in the global financial media: KEB Hana Bank, KB Kookmin Bank, Shinhan Bank, Woori Bank.
Sophia Lee, Moody’s
They crop up here and there, but usually only when a Korean firm is looking to sell a business unit, or fill the books on a juicy IPO or syndicated loan.
None is a pan-Asian brand, let alone a known presence on the global stage.
“Korea’s banks have been a bit slower to expand in Asia and globally than the Korean chaebol have,” admits Kim Seung Hyun, head of global business at Busan Bank, a regional lender based in the bustling southern port city of the same name.
That may be changing. In recent years, Korea’s biggest lenders have expanded their presence or have applied for and secured new operating licences in key markets in southeast Asia and south Asia.Over the last 18 months Shinhan, the largest domestic bank by assets, has opened branches in Sydney and Yangon, and acquired two banks in Indonesia.
In April 2017, it bought ANZ’s Vietnam retail business, which serves 125,000 customers in one of the region’s most vibrant emerging markets, taking its global presence to 150 branches in 20 countries.
The Vietnam deal, Shinhan says, allows the bank “to further consolidate its global business strategy of building an Asian financial belt linking Japan, China, Vietnam and India in the major financial markets of southeast Asia.”
Woori Bank, currently under investigation by Korean prosecutors for alleged hiring irregularities, has also been busy far beyond its shores. In June 2017, it injected $100 million into PT Bank Woori Saudara, its Indonesian subsidiary, part of long-term plans to bolster its capital base and transform the smallish lender into a top-five domestic player.
For all of its problems at home, where it is the second-largest lender by assets, Woori is probably the country’s most ambitious lender abroad with 275 outlets in 25 nations, including 144 branches in Indonesia, 21 in Myanmar, 15 in Cambodia and 17 in the Philippines.
It also runs a small retail operation in Vietnam and a representative office in the Indian financial capital of Mumbai.
Net profit from its overseas operations hit $83 million in the first half of 2017, up 92% year on year. Woori tells Asiamoney that it “aims to ultimately become the unrivalled leader among Korean banks, as well as one of Asia’s top-10 banks, with 500 overseas branches by 2020”.
What explains this sudden desire to sally forth and explore uncharted or under-explored territory? And why have they taken so long to tear their gaze from their home market and summon a coherent foreign policy?
Korea’s leading banks are, at heart, “deliberately cautious and conservative” animals, says HongTaik Chung, an analyst at S&P Global Ratings. They are also far smaller, measured by any conceivable metric, than their leading peers in east Asia.
And size still matters in banking, notes Chung, who adds that their lack of scale “is a major constraint for large-scale M&A, and helps to explain why they have been so much slower to expand internationally than the Chinese and Japanese megabanks.”
This helps explain why they generate so little income abroad. Shinhan generated 12% of profits overseas in 2016, according to its annual report. Hana Financial Group, the parent of KEB Hana Bank, with operations in China, India and Indonesia, has set out a bold goal of generating 40% of group profits overseas by 2025, up from 10% in 2016.
But these are standout cases. Sophia Lee, a Hong Kong-based analyst at Moody’s Investors Service, reckons the average Korean lender sources just 5% of its annual income from outside its home market.
Then there’s the simple fact that for many years, Asia’s third-largest economy was a great place to be a bank, so long as you were locally owned.
The financial regulator in Seoul did its damnedest to protect the big local players from excess foreign competition. And in heaping onerous rules on all lenders, the Financial Supervisory Service also discouraged local players from pushing into new markets.
“Strict regulations by the FSS and the central bank delayed Korea’s banks from expanding across Asia and globally,” says Busan Bank’s Kim.And for a long time the big local banks didn’t much need the outside world.
“The profitability of Korea’s banking system deteriorated significantly in recent years,” notes Moody’s Lee. Industry-wide return on assets remained well above 1% long after the global financial crisis, creating more than enough demand and new growth opportunities in the local market.
But all that has changed. Local banks have for years been struggling to tap into new sources of profit. Industry-wide RoA fell to just 0.16% in 2016, according to the Korea Financial Investment Association.
Profits did rise in the first half of 2017, with industry-wide net income up to W8.1 trillion ($7.4 billion), according to FSS data. But that was a one-off, analysts say, resulting from a fall in loan-loss provisions, with banks having the previous year set aside hefty reserves against troubled shipping loans.
Wherever lenders look, they now see danger. There’s the emergence of new digital lenders like Kakao Bank and K-Bank, popular among young people and entrepreneurs. Regulators meanwhile seem as determined as ever to impose rules and crushing fines on traditional lenders to stop them straying from the path.
Then there’s the domestic market itself. Korea’s economy is growing steadily without finding any new sources of growth. If IMF predictions are correct, GDP growth will be at the same level in 2022 as it was in 2013, namely 2.9%, having barely varied in between.
A bigger problem is demographics: the age of the average Korean in 2016 was 41.2 years, according to the CIA World Factbook, making it Asia’s second-oldest economy after Japan.
Reaching its limit
Despite still being tagged as an emerging market by index provider MSCI – due to the capital account not being fully open and because of the limited international liquidity and presence of the won – Korea’s is a highly industrialized and mature economy with little room left for banks to grow.
And a lack of new growth opportunities translates into a paucity of fresh lending opportunities. Financially, notes Busan Bank’s Kim, Korea has “reached its limit regarding profit generation due to the prolonged trend of slow economic growth and low interest rates”.
For a while, banks managed to pad their profits thanks to a sharp rise in mortgage loans, which helped lenders to expand their core lending business. But this also put a rocket under household debt. The Seoul-based consultancy Hyundai Research Institute tips household debt to hit W1.54 trillion at the end of 2017.
President Moon Jae-in, elected in May 2017, has pledged to reduce inequality by tackling the nation’s mortgage overhang, thus eating into bank profitability.
This in turn explains why local lenders have suddenly become so adventurous. Woori Bank admits that its global expansion plan was one of its top priorities and necessary to overcome local business limitations. The focus of its ambition would be on southeast Asian countries with high growth potential, it adds, using a judicious mix of organic and inorganic growth.
Kookmin had to write down their entire investment, bringing the book value down to zero. It was a very painful experience for them - Sophia Lee, Moody’s
Busan’s Kim says the lender is focusing its efforts on expanding its financial network in southeast Asia and China, where there is “high potential demand for financial services, in order to develop new growth momentum”. Shinhan says its expanding Asian network is “laying solid foundations to becoming a world-class bank”.
But can they do it? It’s worth remembering that Korea has been here before. Its big banks, notes one Korea-based analyst, “tried to expand around 2007/08. They were generating good returns at home, they had cash on hand, and with the chaebol starting to make waves abroad, the big banks had a clear incentive to expand with them.”
A complex internal dialogue was under way in Seoul, with lawmakers and corporate leaders asking why, in the words of a senior financial figure, “Korea could create a Samsung but it couldn’t create a Bank of Samsung.”
Plans were drawn up in 2008 to privatize Korea Development Bank, part of a slew of financial-sector reforms intended to make Korea’s lenders “far more active in overseas investment banking activities,” says S&P’s Chung. Then the global financial crisis hit. Plans were tempered, then shelved, then scrapped.
Lee Myung-bak, president from 2008 to 2013, wanted Korean banks to be bigger and bolder. But, notes a S&P analyst, “after the financial crisis, risk appetite changed, and there was less desire among banks to be internationally aggressive”. Lee’s successor Park Geun-hye finally pulled the plug on the KDB sale in 2013, choosing to merge it with policy lender Korea Finance Corporation.
Then there was KB Kookmin Bank’s ill-starred adventure in Kazakhstan. Korea’s largest retail lender bought 30% of Bank Center-Credit (BCC) in 2008 for $634 million, part of an aggressive globalization strategy, later raising its stake to 41.9%. At the time, the central Asian nation’s sixth-largest lender, with its booming mortgage business and total assets of $7.3 billion, must have looked like a good bet.
Then the financial crisis struck. The value of BCC plummeted, then fell even further when Kazakhstan devalued its currency, the tenge, in 2014. Kookmin adjusted the value of its stake downward, from W939.2 billion at the time of the acquisition, to W185.8 billion in 2012, and finally, in late 2016, to just W1,000.
The loss – and the humiliation it entailed – led in 2010 to the resignation of bank chief executive Kang Chung-Won. In April 2017, the Korean lender sold its entire stake in BCC to a consortium of domestic investors including Tsesnabank, for an undisclosed sum. “Kookmin had to write down their entire investment, bringing the book value down to zero,” says Moody’s analyst Lee. “It was a very painful experience for them.”
Eye on southeast Asia
Will the latest regional expansion plan work? Or are Korea’s financial big hitters destined to be tentative travellers, who trumpet their ambitions and make waves in a few key foreign markets, then scurry home when a deal goes awry or the next crisis hits?
The answer may well be a bit of both. For now, the industry seems determined to really make something of itself. S&P’s Chung tips the big Korean lenders to continue to focus on “key markets like China, Japan and the US, all with sizeable Korean diaspora”. But the real growth opportunities lie in the great developing markets of southeast Asia.
“This is where their corporate customers are going, so this is where the banks are going too,” says Lee at Moody’s.
Take three fast-growing regional markets, all favoured destinations of Korean tourists and companies. Indonesia is a key focus, with Woori, Shinhan and KEB Hana Bank leading efforts to profit in southeast Asia’s largest economy.
The Philippines is another target. In November 2017, KB Kookmin filed an application with the Bangko Sentral ng Pilipinas to open its first branch in Manila, following in the footsteps of Woori, Shinhan and Industrial Bank of Korea with its focus on small businesses.
“The Korean expat community in the Philippines is growing rapidly,” Bong Consing, president and chief executive of the Bank of the Philippine Islands, the second-largest local lender by assets, told Asiamoney. “I think interest in Korean banks in the Philippines will probably follow.”
Then there’s Vietnam. Shinhan’s purchase of ANZ’s local retail business grabbed headlines, but in truth few Korean financial institutions are either not already there in force or planning a big push.
The talk in Vietnam’s banking and finance circles is that KEB Hana would dearly like to buy a stake in BIDV, one of the country’s largest and stodgiest lenders. In September 2017, investment bank Samsung Securities joined forces with Hong Kong-based private equity firm Caldera Pacific to buy a 40% stake in Dragon Capital, Vietnam’s largest asset manager.
This interest in Vietnam is easy to explain. Samsung Group has invested an estimated $17 billion in the country over the last 10 years. It makes 70% of its mobile phones there, most of them in a huge factory in the capital Hanoi, accounting for 22.7% of the nation’s exports in 2016, according to the General Statistics Office.
And where Korea’s biggest brand goes, the country’s lenders are finally starting to follow. Lee Joeng-Soo, head of investor relations at Woori Bank, says the lender is “targeting factory workers [in Hanoi], using them to expand our market share. We have a branch inside the Samsung complex. It’s all part of our global strategy, which is focused on southeast Asia’s high growth potential.”
Three main hurdles may prevent Korean banks reaching their goals. First, they need to acknowledge the detrimental effect of the banking sector’s managerial merry-go-round.
In Korea, bank chiefs are contracted to fixed two-year terms. If they do well, their boards may reappoint them for one or two more years. While turnover is good for some (chiefly, rising stars seeking their turn on the carousel), it’s hardly a great way to plan for the long term.
“Frequent chopping and changing means no one can stamp their authority,” says the Korea country head of a leading foreign bank. “To know what you are doing as a bank in five or 10 years’ time, you need a consistent strategy, but that never happens.”
Second: adaptation. Korea’s throttling social hierarchy means its leading corporates often struggle when they first venture abroad. Samsung and its cohort have learned to adapt to new cultures and working practices, but that may not prove as easy in a more client-facing business.
“Banking is a service industry,” notes Tohphan Tuchinda, head of corporate affairs at Citi in Thailand. “You need to talk more to the people. You can’t just set up factory and count on the locals to run it. I don’t think Koreans like to work abroad. Their strong national culture will be a big hindrance for them becoming a regional player.”
Third, and perhaps the most prickly issue of all: are Korea’s banks good enough? After all, it’s one thing to break into a new market, but quite another to meet new clients, convince them to trust you with their capital, and generate returns for them (and for you), year in and year out.Park Ju-gun, president of CEOScore, a Seoul-based research firm that analyses management performance at domestic corporates, has his doubts.
“Korean banks make far less profit than the best regional and global banks,” he says. “And by comparison, their operating structures are uncompetitive and weak.” An executive at a foreign-owned lender in Seoul adds: “The risk management skills are just not there. They do not often meet international best practices.”
For Korea’s big banks, the road ahead is strewn with promise or peril – perhaps both. It is one thing to set up a branch in Tokyo or New York to cater to the wealthy diaspora, but quite another to pump valuable capital into freewheeling emerging markets in the hope of turning their potential into your profit.
So, could Korea’s banks ever become as globally powerful and relevant as the sprawling conglomerates atop which Korea’s economy is built? A Seoul-based executive working for a big foreign lender shakes his head.
“Will Korea ever have a Samsung of banking? No,” he says. “Will a Korean lender ever be the global bank of choice for a chaebol? No. What those companies want when it comes to corporate and investment banking services in China or the US or Europe is not a Korean bank. It’s a bank like ours.”
In other words, a bank that can provide global cash management, treasury, project finance and a host of other services.Yet there’s always hope. Busan’s Kim admits the nation’s banks have been slow off the mark internationally, compared with their peers in Japan and China, let alone the West.
“But slowly and surely, the big Korean banks will expand across Asia and globally over the next 10 years. One day, we will really shine on the world stage.”