The end of the beginning

Two years ago the Korean banking sector was in crisis. Foreign banks were nervous of making acquisitions. Today, although total banking-sector losses are still high, a core of mid-sized profitable banks has emerged. None, though, is large enough to prosper in the long term and the race is on to find complementary partners in an increasingly competitive market. Simon Brady reports

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It was the job no one wanted. Seoulbank, bust and in government hands, had already failed to attract a foreign buyer. HSBC, the most serious suitor, was not prepared to pay the asking price once it looked closely at the books. It had progressed as far as signing a memorandum of understanding with the Korean government back in February 1999. After months more of negotiations the deal fell apart.

At that point, the government decided its only hope of getting back any money was to privatize Seoulbank as a going concern via an IPO. To do that it needed an institution and management that could turn the bank around.
The government appointed Morgan Stanley, its adviser on other sales, such as that of Korea First Bank, to Find an institution willing to take a management contract for the bank. No-one wanted the job. The US investment bank teamed up with international head-hunters Egon Zender in an attempt at least to Find a chief executive officer. Again, no one answered the call.

Finally, on April 14 this year, the government persuaded Deutsche Bank to become Seoulbank's "Financial and restructuring adviser". This was at First a turnkey contract: Deutsche would conduct due diligence, review the bank's core operations and come up with a restructuring plan. This has been completed. The bank was then to help select a new CEO and management team. It succeeded but at a cost. It found the right man for the job but in doing so lost from its own ranks one of Korea's most distinguished bankers, a veteran of Citibank, then head of Bankers Trust in Korea and for the past year the head of Deutsche's Korean operations following the acquisition of BT.
So why did Kang Chung-Won take the job as president and CEO of Seoulbank? "It was the challenge - the challenge of taking what is essentially still a good franchise and turning it around," he says. "This was an opportunity few people get - to rebuild an institution, to take it to the market and to help repay the government's investments in it.
"Also, without trying to downplay the scale of the problems, remember that I came in at a point when Deutsche Bank had done the due diligence, identified the key problems and come up with solutions that conform to international best practice. Deutsche is also committing considerable resources to the bank including investment and commercial banking experts, risk management and systems personnel and bank recovery specialists. I'm not alone!"
If the size of the restructuring task itself were not enough, June 1, Kang's First day, reintroduced him to one of the headaches of managing a Korean bank: unions. "My First day was a 37-hour stretch straight through - we slept here in the office," recalls David Warner, senior deputy president and CFO, who joined on July 10. Warner had just moved, after 18 months as a director and adviser at Korea Development Bank, at the urging of the new CEO. A bank strike had been called for July 11 by the Federation of Banking Unions and management wanted to be around to deal with the consequences. Kang has put in 15 hour days ever since.
"Some people might say that the employees of a bank in that parlous a state were somewhat foolish to go on strike just as they found a CEO and CFO after a year of trying," says a senior executive at a rival. "But you have to understand that the unions here are highly political and had no real gripe with management. Also, in that case, Seoulbank was particularly unlucky. Their chief union representative was the campaign chief for the head of the Federation of Unions, so he had no choice but to support a strike call from the Federation. I'm sure he apologized to the new management. That's how things work."
As if to confirm the two faces of these protests, at the time of Euromoney's visit, a huge banner - though on the rear of the building facing the car park - protested against job losses. It hung with the consent of a management committed to a restructuring that will inevitably lead to just that kind of downsizing.
The senior management team is now in place.
Kang has hired key individuals from his foreign rivals: a chief operating officer from Citibank, Chang Hyung-Duk; a deputy COO also from Citibank, Miss Kim Myung-Ok, the country's most senior female banker; and a new chief credit officer, Choe Dong-Soo, who has worked at Seoul Securities, Kamco and the leading Korean ratings agency. Deutsche at the time of writing had not replaced the senior banker it lost to Seoulbank.
Huge clean-up for IPO
The new team faces an immense task. Cumulative net losses in just 1998 and 1999 were a little under $4 billion as the bank sold bad assets to the Korea Asset Management Corporation (Kamco - the government's main clean-up vehicle) at deep discounts. The clean-up has left the bank with NPLs of 8.87%, a BIS ratio of 10.41%, assets of $19.3 billion and shareholders' equity of $911 million.







Seoulbank: planning an IPO in the first quarter of 2001

For the year 2000 the bank will focus on upgrading its operations and risk management tools and further reducing NPLs. Once this has been accomplished, the bank expects to end up with a capital base that will result in a BIS ratio of more than 12%.
"The aim for 2000 is to Fix the house and become one of Korea's soundest banking institutions in preparation for an IPO in the First quarter of 2001," says Kang. "Is that realistic? Yes, I think it is. And I think it is also realistic for the Korean government to expect to get its money back out, as long as they are realistic about the time frame for that."
Kang Chung-Won's biggest problem after implementing the bottom-up restructuring of management, credit culture and risk management will be competition. His most intriguing rival, and perhaps with it the institution that all the others should watch, is Korea First Bank (KFB).
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Abigail Hofman:

No. 6: If you don’t give it to me you’ll only lend it to someone else and look where that got us

The end of the beginning

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