The Korean Banking Sector:
“Are we there yet?”
February 1, 2005
Origins of the System
• A key part of the Korean economic miracle of
the 1960s-90s.
• Reliable source of cheap credit to targeted
industries/companies.
• Government allocation of credit is the
centerpiece of national economic policy.
• All is hunky-dory until ~1993.
The Big Bang
• Overinvestment and poor allocation of capital
lead to sub-par investments
– Chaebols enter various uncomplementary
businesses
– Political favor counts for more than high potential
returns
• Corporate cash flow turns very negative
• Banks with thin margins can not sustain bad
debt write-offs
The Shakeout
• Collapse of major Daewoo, Hyundai companies is the
final blow.
• More than half the banking industry fails; the
remainder is badly shaken.
• Major consolidation of bad banks (ex: Woori
Financial) and bad assets (KDB, KDIC) takes place.
– Commercial banks go from 33 in 1997 to 19 in 2004.
– Merchant banks go from 30 to 2 over the same period.
• Over $150bn in government funds injected.
The Double-dip
• Having long shunned consumer lending for corporate
loans which have proven lethal, Korean banks begin
to throw credit at the consumer.
– Average bankable Korean has 6+ credit cards by YE2003
• The credit cycle turns abruptly but inevitably after 4
years of 100%+ growth.
• Virtually every credit card company goes bankrupt,
including all of the big 3: Kookmin CC, LG Card, and
Samsung Card.
Where are we now?
• Four major domestic bank groups:
–
–
–
–
Kookmin
Shinhan/Chohung
Woori FG
Hana
• Three large foreign-owned players:
– KorAm (Citibank)
– KFB (Standard Chartered)
– KEB (Lone Star)
Competitive Pressure Rising
• Citi and StanChart have largely clean entities
to build on.
• HSBC, DBS, JPM, and Barclay’s are also looking
to buy in or start aggressive local operations.
• Domestic banks’ product offerings & skills are
still weak.
Financial Position
• Domestic banks still distressed by global
standards
– Reported NPLs of 2.37% are probably close to 6%
on an int’l standard basis
• ROA of 0.74% (9mos04) is low vs global avg of
1.31%
• Deposit rates still very high by Asian/world
standards
– 91d CD rate is 3.5% in Korea, vs. 0.25% in Sing.,
0.01% in HK
Constrained Growth
• Consumers remain over-geared
• Strong exports will continue to create capital
investment; however…
• Business expansion is increasingly funded by internal
cash flow or by borrowings in the international
capital markets.
– When banks fight the bond market, the banks lose
• Low capital adequacy ahead of Basle 2 means that
banks have limited capacity for expansion anyway.
What’s the way forward?
• Banks must focus on “asset-light” activities:
– Loan origination, not necessarily loan warehousing
– Move excess deposits into investment products
• Mutual funds
• Insurance
• Originate smarter products with more “valueadd” for customers
– Fixed rate and offset mortgages
– Revolving credit cards
The way forward (cont.)
• Higher capital efficiency will remove the threat
of further involuntary consolidation
• The presence of foreign banks will be a
constant worry for laggards
– Market share losses
– Threat of acquisition
Some Final Thoughts
• Don’t count out the non-banks
– ITCs and brokers could also capture consumer investment
dollars if banks stumble
– Consumer finance, leasing, and cards will all be
back….perhaps with foreign backing and management skill
• Don’t automatically bet the foreign banks
– Citi, HSBC, and StanChart have all stumbled before in new
markets
– Domestic banks will copy innovations and poach welltrained staff more quickly than anyone thinks
Contacts
Paul Sheehan
paul@asianbanks.net
+852 9192-3105