Euh Yoon-dae, the new chairman of KB Financial Group, slashed his pay by 15 percent, embarking on a campaign to tackle low productivity and inefficiency at the country’s largest financial group by asset.

The voluntary pay cut is in line with what Euh said in his inaugural speech and it is likely to spread to other executives, a group official said Wednesday.

“Compared with peers, KB has an inflated wage and employee structure and risks sharp bad loans increases due to its focus on specific industries,” Euh said upon his inauguration on July 13. “We need to slim down and cut costs…to achieve our vision of becoming a global bank.”

The pay cut is just a small part of the new leader’s prescription for KB Financial, which according to him is “a patient suffering from obesity."

A 90-man taskforce team is up and running, tasked with identifying areas for improvement to reduce costs and increase profits.

Euh is also speeding up filling key executive positions who he hopes will assist him as he seeks to overhaul KB Financial and its units including the nation’s largest commercial bank Kookmin.

On Monday, Min Byong-deok, head of consumer banking at Kookmin, has been named as the lender’s chief executive officer. Former vice finance minister Lim Young-rok has been picked to take the CEO position at the parent group.

Min, 56, is a veteran banker, having worked at Kookmin for nearly 30 years across core departments such as consumer, corporate and private banking.

Analysts are paying keen attention to whether Euh, known for his strong leadership, will be able to turn KB Financial, a giant in the Korean financial field, into a true leader.

KB Financial is the nation’s largest financial firm by asset, running the largest commercial bank Kookmin. Its total assets amount to 325 trillion won and employees more than 27,000 employees.

Its main unit Kookmin stands virtually unchallenged in retail banking, with 26 million customers and nearly 1,200 branches. Second- and third-ranked Woori or Shinhan have about 17 million customers and branches less than 1,000.

The average pay for Kookmin staff, excluding executives, is the industry’s second highest, trailing only Shinhan.

Still, when it comes to labor productivity and profits, KB Financial pales before rivals.

At the end of March, per capita profit of Kookmin Bank was less than half of that of Shinhan Bank. The figure, which indicates the level of productivity and efficiency, stood at 20 million won for Kookmin, while Shinhan boasted 45.6 million won and Woori 30.9 million won and fourth-ranked Hana 32.2 million won.

In the first quarter of 2010, Shinhan Financial Group, the parent of Shinhan Bank, reported profits of 779 billion won, compared to 572.7 billion won of KB Financial.

Return on assets, a key profitability ratio which measures the amount of profit made per dollar of assets that they own, came in at 0.88 percent for Kookmin, far lower than Shinhan Financial’s 1.2 percent.

Furthermore, KB Financial is forecast to swing to a loss in the second quarter due to higher loan-loss provisions at Kookmin. It is scheduled to report earnings on Friday.

Tackling low labor productivity and inefficiency is the No. 1 priority for KB Financial, Euh has said, more urgent than anything else, even the pursuit of becoming a “mega-bank.” 

“KB Financial’s competitiveness has been weakened. There will be no M&A deal in banking or securities fields until this is fixed … however long it takes, be it 2 years or 5 years,” Euh told reporters after inauguration.

Euh has been a vocal advocate of the mega-bank theory, which claims that to develop the local financial sector, Korea needs to allow M&As amongst major local banks in order to create a few mammoth banks that would rank within the world’s top 50.

After winning the nomination for the KB Financial chairmanship, he had expressed interest in taking over state-run Woori, which the government plans to privatize in near future.

To focus on strengthening the group’s competitiveness, Euh said he will use the cost-to-income ratio as the main yardstick in running the group. KB Financial’s cost-to-income ratio rose from 42 percent in 2005 to 54 percent last year.

The cost-to-income ratio is a key measurement of a bank’s efficiency, like the operating margin is to manufacturers. Unlike the operating margin, lower is better.

The ratio for KB Financial worsened to 54 percent in 2009 from 42 percent in 2005.

Diversification of the group’s bank-focused business portfolio is another challenge awaiting Euh, as he tries to put the group on a more solid footing.

KB Financial has nine units: Kookmin Bank, KB Investment & Securities, KB Life Insurance, KB Asset Management, KB Real Estate Trust, KB Investment, KB Futures, KB Credit Information and KB Data Systems. But one -- Kookmin -- earns more than 90 percent of the group’s profits. Among the remaining eight, only two -- KB Investment & Securities and KB Asset Management -- contribute to more than 1 percent of the proceeds.

Out of KB Financial’s 27,568 workers, more than 25,700 belong to Kookmin.

Rival Shinhan Financial Group boasts a much more balanced business portfolio, deriving 60 percent of its profits from banking and the rest from non-banking businesses.

“With the current business portfolio, which is heavily concentrated on banking, it is difficult to secure sustainable growth,” Euh said.

To diversify revenue sources, the group will spin off the credit card business from Kookmin and will consider expanding into the consumer finance market, he said.

It will pursue an organic growth strategy for securities and insurance businesses for the time being and consider mergers and acquisitions at an appropriate timing in the future, he added.

By Lee Sun-young (milaya@heraldcorp.com)