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Lee Myung Bak: his desire to push through reforms has earned him the title of "bulldozer" |
ON A MILD April afternoon in Seoul, a line of converted buses with darkened grille-covered windows brood outside the Korea Exchange building. Just inside the glass doors, neat rows of bored-looking police kneel on riot shields. In tomorrow’s elections, newly elected president Lee Myung Bak will win the slender parliamentary majority needed to enact some of the reforms he has been promising. For now, though, the presence of protesters and police serves as a reminder of the incident just days after his appointment when temporary employees without contracts from Koscom, the Korea Exchange’s information-distributing subsidiary, demonstrated and were forcibly moved on.
The narrowness of Lee’s victory and the lingering labour union activism suggest the finely balanced sensibilities at work as Korea looks to reinvigorate its economy and reform its markets. Lee has acquired the nickname "bulldozer" for his unyielding get-it-done attitude and desire to push reform through parliament; he only holds the slimmest majority, however, and the more left-leaning opposition’s popularity is proof that not everyone in Korea is as pro-market as he is.
Now he faces his first great post-election challenge, a project that promises not only to test the administration’s capabilities and agenda but also to shape the future of Korea’s domestic and cross-border banking industries. The project is the much-debated privatization of Korea Development Bank, the government-owned funding vehicle that has since 1954 shepherded the country’s economic rehabilitation.
Lodged in a spacious and architecturally adventurous headquarters building near the National Assembly, KDB is something of a national treasure. Many Koreans are proud of the role it played in restoring the country’s post-war industrial capabilities, developing its capital markets and issuing benchmark notes. The exact shape that privatization will take now that the bulk of that work is done is fast becoming a matter of contention. One senior banker at a foreign institution advises: "Don’t get sucked into that debate. It’s getting pretty heated."
There are essentially two proposals. The first, said by outsiders to be favoured by employees of the bank and the country’s financial regulator, the FSC, is to run KDB and its securities subsidiary Daewoo under a newly created holding company. The second is to merge the bank with the other two state financial institutions, Woori Financial Group and Industrial Bank of Korea, to create a megabank with estimated total assets of W556 trillion ($568 billion). Korea’s private-sector banks are worried by the potential emergence of such a big institution: Kookmin and Shinhan, the two largest, have assets of W232 trillion and W208 trillion, respectively.
It’s not yet clear which proposal Lee favours, but there’s no doubt that he sees the swift privatization of KDB as a priority. He has said repeatedly that he wants the plan to be completed within three years, and that the goal is to foster an internationally competitive Korean investment bank. Local media reported him in a televised press conference on April 13 as saying: "The privatization of KDB will be completed in three years, not in four as earlier stated. We are trying to do it as quickly as possible and are considering various ways to privatize it. The government is now deciding between selling KDB alone and merging it with Woori and the Industrial Bank of Korea to create a mega-bank."
Staff at KDB are understandably reluctant to comment on the record about what they would like to happen, stressing only the need to transform the shape of the institution to focus more on investment banking.
"We expect a plan to be disclosed by the end of April setting out the details of the privatization and the time-frame," says Kyung Chae Jung, general manager in the global banking department. "We expect to set up the holding company and prepare the legal framework this year, and then begin thinking about an IPO from next year."
Not everyone with a stake in how the privatization takes shape is as reticent, however. BH Park, managing director and head of investor relations at Woori Financial Group, is forthright in stating his firm’s ambition to buy key KDB assets. "We’re not so much interested in KDB itself as in some of its subsidiaries, including Daewoo Securities and [credit company] KDB capital," he says.
Crucial acquisitions
Park says that acquisitions are crucial for Woori Financial Group because it will otherwise be hard to battle declining profitability in a difficult banking environment.
"We have already diversified our business lines," he says, "so without M&A opportunities growth may be difficult. Even though we are a large financial group the synergies between our subsidiaries are not as good as they might be, and with interest margins decreasing here, raising profitability is the key challenge."
The urgent need for Korea’s financial institutions to diversify earnings and strengthen their positions in the challenging months ahead is summarized in an industry report card by ratings agency Standard & Poor’s: "Korean banks have made substantial efforts to diversify their revenue sources, but profits still depend heavily on net interest income... Inter-industry competition fuelled by the capital market consolidation act, to be implemented in 2009, could pose challenges for Korean banks due to the gradually changing environment of Korea’s financial markets."
Days after Euromoney’s visit, KDB governor Kim Chang Lok tendered his resignation without providing comment; local press speculated that the move might have been a response to the president’s calls for urgent restructuring. The key challenge for the privatized KDB, in whichever form it emerges, will be to meet the president’s challenge and become a flagship Korean investment bank. That means winning mandates in Asia, a tough proposition in the face of competition from Wall Street firms, Asia’s increasingly competitive local banks and Japan’s resurgent megabanks.