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Headline: The end of the beginning Source: Euromoney Date: September 2000 Author: Simon Brady 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 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.
“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). Will the vultures win? KFB was, in its heyday, one of Korea’s largest and most international institutions with 49 overseas offices in 22 countries and 455 branches in Korea. It was the monopoly provider of foreign exchange and trade Finance services and established joint-venture banks in China and Vietnam. Its customer base was some 30,000 corporate customers, six million retail customers and 4.8 million credit card customers. At its peak it employed more than 8,000 people. After the Asian crisis the bank’s capital fell from W820 billion (US$720 million) to W100 billion after a January 1998 government recapitalization. Total assets at the end of 1999 were W42 trillion with shareholders’ equity of W2.7 trillion. Seoulbank and KFB have no choice but to change profoundly and rapidly. That’s because both have controlling shareholders demanding a timely return on their investments in distressed assets. The difference is that KFB is majority-owned by Newbridge Capital, a US private equity fund, whose time-frame and return targets may be more aggressive than those of the Korean government. Both banks’ managers, though, see their respective turnarounds as a race. Will aggressive intervention by the likes of Robert Barnum, Michael Cantor, Richard Blum and other high-profile foreign board members work better for KFB than the home-grown but foreign-trained talent at Seoulbank? Newbridge almost didn’t take up the challenge. After protracted negotiations the fund walked away from KFB in September 1999. Only after three more months of intense haggling – the bank signed a definitive agreement on December 23 1999 – did it eventually inject W500 billion to take a 51% stake in the bank. KDIC retains 49%. Newbridge also agreed to inject another W200 billion over the next two years to keep the bank’s BIS ratio at 10%. So far the government has had to inject around W7 trillion into the bank and as a result of the collapse of Daewoo, that Figure may rise. In mid-August, as KFB announced W3.5 trillion of overdue loans, Newbridge exercised its option to put W2.7 trillion back to the Korea Deposit Insurance Corporation (KDIC). Japanese-American Wilfred Horie, the new president and CEO of KFB, is well equipped for the job. His previous career was at Associates First Capital Corp, the huge US credit- card and consumer-Finance Firm. He set up some of the group’s most profitable operations around the world and as well as hard-nosed US management practices he brings to KFB a talent that all Korea’s banks will need if they are to prosper: risk management and, in particular, an understanding of the techniques required for managing large numbers of relatively small exposures as a portfolio. “A lot of what was going wrong in Korea was very straightforward,” says Horie. “First, lending decisions were being taken by a variety of different departments and individuals without any co-ordination or central management. Second, the portfolio of assets created by this process was then not actively managed at all.” In addition, KFB, like all Korean banks and many Asian institutions in general, was handicapped by the traditional promotion and compensation structure that rotates and promotes personnel on the basis of Fixed terms of office and seniority. Payment on the basis of performance was until recently non-existent. Horie has been at the bank for only a few months but already the credit culture has changed. Branch managers can now approve unsecured loans of just W30 million and collateralized loans of just W300 million. A whole layer of redundant management has been removed and new graduates hired. Performance-based pay will be introduced. The overseas network has been cut to four and the domestic branch network to 339. The workforce has fallen by almost 1,000 to 4,853 And the restructuring team is working hard on the remaining bad assets, though the gulf between local and foreign skills in this area is highlighted by the fact that in the elevators the only department labelled in English is the credit-workout section. Newbridge also brings a particular set of skills to the ailing bank. The company, set up by Texas Pacific and Richard C Blum & Associates, is best known for its association with the Bass brothers – wealthy Texan real estate investors – and their highly successful investments in assets purchased from the US Resolution Trust Company (RTC), the distressed asset vehicle set up by the US government as part of the $300 billion clean-up of the Savings & Loan crisis. In addition to Robert Barnum, chairman of the board of KFB and a veteran of the RTC restructurings, Newbridge will also be providing the chief credit officer, the chief operating officer and the chief Financial officer. The Korean heavyweight on the board is Kim Chul-So, a former trade minister who was recently appointed vice-chairman of the bank. More restructuring to come Seoulbank and KFB are just two runners in the wider race to emerge ascendant from a second phase of bank restructuring that everyone acknowledges is coming but which no one seems to believe will lead to the disappearance of their own institution. Take Kim Seung-Yu, president and CEO of Hana Bank, Korea’s fourth largest in terms of deposits. In his view there are too many banks in Korea. He agrees, smiling, that this implies substantial rationalization of the present 22 institutions. He also agrees that Hana’s balance sheet of W46.1 trillion is far shy of the Figure required to be a player. But does that mean that he and his peers are at this moment planning the next round of mergers? And will Hana buy or be bought? He’s not saying. The response is similar at Shinhan, the country’s eighth largest bank by assets and arguably its best institution, where president and CEO Lee In-Ho acknowledges the need for change but is unwilling to speculate on the precise aims he has for his institution in the coming M&A scramble. Rumours of a tie-up with mortgage specialists H&CB) have been repeatedly dismissed. Indeed, rather than merge with each other, many of the country’s best-performing banks have either sold strategic stakes to foreigners or have established product-specific tie-ups with them. Kookmin Bank, the country’s largest private institution by assets, is 11.07% owned by Goldman Sachs. H&CB, Korea’s fourth largest bank, has sold a 10% stake to Dutch insurance and banking giant ING. And Commerzbank has a 31.6% stake in Korea Exchange Bank, the country’s Fifth largest bank and still 32.2% government-owned. The price of entrée Most recently, in February, Hana and German insurance company Allianz (already a player in the country through a 51% stake in First Life Insurance) announced a strategic partnership in which Allianz took a 12.5% (W126 billion) stake in Hana, becoming its single largest shareholder. The ostensible purpose of the stake is to allow Hana to use Allianz staff in its branches to sell Allianz insurance products. However, the two partners are also committed to a 50/50 joint- venture asset-management company. The 12.5% stake in Hana was the price Allianz was prepared to pay for an entrée into Korea’s nascent mutual fund business.
“Hana would much rather have just used Allianz as a bancassurance partner and kept the asset management business to itself,” says a well-placed source inside the company. While foreign ownership, at least of KFB and Seoulbank, was a condition of the IMF bailout package, and there are sound commercial reasons for these alliances, some suggest that there is another, less obvious reason, for Korean banks to cede these stakes so willingly. In its “Policy Directives on Banking Restructuring and Mark-to-Market System”, the government says that for those banks which did not receive any public funds after the crisis “voluntary restructuring measures including mergers are to be induced”. Those which did receive public funds will be “actively induced” to restructure. Even allowing for subtleties in translation, this suggests not only that healthy banks will be quietly pressed to get together, it also looks as though the government has not ruled out forcing the healthy to take on the sick. That would be more difficult if powerful minority shareholder objected. Other tie-ups are either technology or know-how transfers. So, Kookmin recently concluded an agreement with Australia’s Macquarie Bank for the development of a derivatives business. Called Kookmin-Macquarie Business Co-operation, it distributes derivatives created and managed by Macquarie to Kookmin’s client base. The joint venture is already one of the leading market-makers in cross-currency and interest-rate swaps with a won leg as well as won currency options. Products such as Five-year interest- rate swaps, simply not available before, are now offered. At the end of March, Shinhan Bank also signed an agreement with Macquarie, though in asset Financing and structured Finance. Hana Bank in June announced a strategic alliance with Koram Bank to allow the banks to use each other’s ATMs and to investigate other economies of scale in technology. This has been interpreted by some as a prelude to a full merger. Again Kim Seung-Yu is not saying. As if private-sector competition were not enough, the profitable mid-sized banks face increasing opposition from Korea Development Bank. Last year, in an interview given to Euromoney, the then- governor, Lee Keun-Young, said that any appearance of KDB competing directly with the domestic commercial and investment banks was mistaken. KDB had a distinct role, one that was not fulfilled by other local banks. How times change. The government is introducing legislation that will allow the creation of bank holding companies under which will sit separate investment banks, commercial banks and securities companies. KDB has very quietly announced that it will be organizing itself around such a holding company, spinning off its investment-banking activities into a separate company, investing more heavily in Daewoo Securities, which it now owns as a result of Daewoo’s collapse (a 20% stake is to be sold to foreigners toward the end of this year) and retaining the core lending businesses in a commercial-banking unit which has expanded its activities in the retail sector in the last two years. Although the government has said that it will not privatize the bank, KDB will become an increasingly important competitor of institutions such as Shinhan and Hana and the development bank is already included in peer-group comparisons by ratings agencies. Incoming KDB governor Uhm Rak-Yong, appointed last month, says the priority now is “to strengthen our profit-oriented operational performance” and the bank’s stated aim is to become “a world-class investment bank.” However, Ho Yoon, executive director at KDB says that “it would be premature to discuss the reorganization of the bank or the possible effects of introducing the bank holding company structure.” His sensitivity is understandable. Were KDB to mimic other development banks, notably NIB of the Netherlands, and become a conventional and bottom-line driven institution, then Korea’s other banks, which have still fully to recover from the crisis, would face a powerful state-owned and guaranteed competitor. A long way to go There is a lot of good news in Korean banking: the general levels of NPLs are down, BIS ratios are up and those medium-sized banks whose strategies were either retail or SME-focused and so which escaped the worst effects of the chaebols’ collapse are doing well.
And the continued push by all banks into the same sectors – small companies, retail and the internet – raise questions about senior management’s strategic vision. Korea’s banks are not out of the woods yet. |
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