Korean banking groups are pumping up efforts to boost their overseas profiles amid a rapidly saturating domestic market, but going global remains an elusive dream for them due to a litany of hurdles, market watchers say.
Although there is an urgent need to nurture local banking groups into global players and further promote the competitive edge of the local financial sector, the task is riddled with challenges, both internal and external.
The challenges include the fragile recovery of the global economy, painfully slow progress in local banks’ overseas businesses, a risk-averse culture and the experience from two financial crises in the last two decades, they point out.
“In the long run, South Korea does need to focus on growth of its financial sector. It is necessary for the balanced growth between the real economy and the financial sector,” said Kim Hoon, an economist at the Bank of Korea. “But situations are not favorable.”
According to the Banker magazine’s 2011 rankings of the world’s top banks by core capital, none of Korean financial firms were among the top 50 and only three banking groups ranked between 51st and 100th.
As of the end of last year, there were a total of 133 units ― subsidiaries, branches and representative offices ― of 11 banks operating in 32 countries. The figure marks a rise from 121 units of nine lenders in 31 countries as of the end of 2007, according to the data by the Financial Supervisory Service. The data includes figures of commercial banks as well as policy lenders.
While the pace of growth is not striking, local banks have been stepping up efforts to set up more overseas units. A 2009 survey of local lenders showed that banks had planned to set up around 40 new units in the future, but the figure expanded 1.5-fold to 60 units in 2011.
The increase was partly attributed to eased rules over establishing an overseas unit. In 2010, the local financial regulator revised the bank law to allow lenders to register new units after they were established, whereas banks previously had to acquire permits for establishment in advance.
Spearheading the efforts are the country’s four major commercial banks - Kookmin, Woori, Hana and Shinhan.
In the latest attempt to expand its business domain, Hana Financial signed an agreement to take over a controlling 51 percent stake in Saehan Bancorp, the parent company of a mid-size bank in Los Angeles.
Hana Financial chief Kim Seung-yu said the bank plans to ramp up efforts to foray overseas on the back of its overseas network in 22 countries. The banking group took over the largest overseas network operated by a local lender via its recent acquisition of Korea Exchange Bank, which has a strong track record for trade finance and foreign exchange.
Woori Bank, the key unit of No. 1 financial group Woori Finance Holdings Co., is also on course to expand overseas. In January, Woori Finance Chairman Lee Pal-seung told reporters the group is engaged in three merger and acquisitions, including two in Southeast Asia.
Another Woori official said the company is interested in purchasing Southeast Asian financial firms, citing Indonesia as a market with huge growth potential.
No. 3 banking group Shinhan Financial Group Co. is also eyeing Southeast Asia, with a focus on deposit loans and KB Financial Group Inc. is keeping tabs on the Asian market, which they say carries many cultural similarities with South Korea.
Policy lenders, such as the Korea Export-Import Bank of Korea and Korea Development Bank, are no exception. After setting up branches in financial hubs in the 90s, they have shifted their attention to emerging markets such as central Asia and Latin America over the last decade.
Industry watchers, however, say expanding into emerging economies carries as much risk as potential.
“All banks say they are interested in Indonesia. But there’s a lot of variables out there, given its emerging market status,” said a bank official who asked for anonymity.
Another official at the country’s financial regulator warned that deals in Indonesia are becoming overpriced as financial firms flock to the Southeast Asian nation.
The person added growing regulatory barriers, including an excessive base capital requirement, may be another potential hurdle for financial players seeking to enter Indonesia.
Others point to the risk-averse culture of the Korean financial industry, a legacy of the 1998 Asian financial crisis, which hinders bank officials from making bold and high-risk decisions.
“Failure is unacceptable in South Korea’s financial industry,” said a senior-level official at Shinhan Bank. “Because banks are seen as public firms, not as private companies, they cannot risk losing money.”
Despite all the roadblocks and overseas businesses progressing at a snail’s pace, Korean financial players are unlikely to give up their ambition to go global, given that growth in the country’s financial market is rapidly stagnating.
Furthermore, what drives the overseas ambitions of these Korean banking groups may lie beyond business tactics.
Lone Star Funds’ profitable, albeit long-delayed, sales of Korea Exchange Bank could have fanned both South Koreans’ animosity toward foreign capital and their yearning for global financial players of their own.
Some Koreans felt bitter about U.S. buyout fund Lone Star Funds pocketing billions of dollars from selling KEB. Others lamented the weak standing of South Korea’s financial industry in the global market.
“Until when should we sit and watch foreign capitals reaping an astronomical amount of profit from our banks whose blood vessel runs our money,” Kim Young-gy, a chief business editor of the Seoul Economic Daily, wrote in a column on Feb. 10.
“Do we journalists have to enviously look at the Citi Group chairman who takes more than 10 billion won from Korea?”
