Banks seek to go global via IB services

Korean commercial and state-controlled banks are seeking to strengthen their investment banking sectors in the belief they will be their new growth engines.

Beyond the saturated loan issuance market, most local banks share the view that investment banking is one of many priorities for globalization in the coming years.

Among them are KB Kookmin Bank, Woori Bank, Shinhan Bank and Industrial Bank of Korea. Other players, including the Export-Import Bank of Korea, are also poised to tap the IB business.

As the banking sector has been quite conservative, introducing IB services by benchmarking global investment banks was not easy.

But after the Capital Market Integration Act came into effect in the local market in 2009 and financial regulations were eased, Korean banks began acquiring securities firms or setting up their own securities units to generate IB business.

Through the high-skilled IB sector, lenders are empowered to help enterprises raise cash by issuing and selling securities in the capital market, as well as offer low-key information on mergers and acquisitions.

KB Kookmin Bank was one of the key players which initiated the competition among Korean lenders for business.

After acquiring Hannuri Investment & Securities from U.S.-based J.D.K Investment Corp., the bank changed the name of the brokerage to KB Investment & Securities.

Competitors such as Woori Bank and Shinhan Bank are increasing the number of IB staffers, pointing out that the core of the business must be specialized and trained manpower.

Shinhan Bank has tripled the number of its IB staff to about 800 over the past two years and is aiming to increase the portion of earnings from the business to 50 percent of total income, based on a long-term project.

The state-run Industrial Bank of Korea also hired hundreds of investment bankers and set up independent bureaus.

Leaders in the financial market, however, stress that the IB business cannot be run independent of retail services, and vice versa.

“IB’s ability to create innovative financial instruments can also be applied for the field of retail financing,” said a senior official of Woori Investment & Securities.

He said a key widespread yardstick to evaluate a brokerage firm’s competence is how good it is at connecting its core competitiveness in IB services to its retail business.

It was foreign investment banking firms that originally triggered the 2008 global financial crisis from U.S. subprime mortgages.

But Korea’s financial leaders claim that local IB newcomers don’t need to be frightened by their collapse.

Many Korean banks saw losses snowball from the sales of derivatives during the crisis. Nevertheless, senior bankers say that it would be unreasonable if local banks were reluctant to invest in the IB sector due to the experience.

The nation’s financial market underwent a series of big events in 2010 and unresolved issues are likely to continue attracting attention in 2011.

Among the highlighted sectors are M&As, raising profitability, and revamping of the management structure.

The M&A issue involves Hana Financial Group’s plan to acquire Korea Exchange Bank and the sale of Woori Financial Group. The Korea Development Bank will also possibly be placed on the auction block.

Hana Bank has been picked to take over KEB and the government plans to sell its stakes in Woori as soon as possible.

Hana’s acquisition would catapult the fourth-largest lender into third place, not far behind the top three ― KB Kookmin, Woori and Shinhan ― heralding fierce jockeying for the No. 1 slot.

Meanwhile, commercial banks’ parent groups ― major finance holding firms ― have been in keen competition to take over debt-saddled savings banks whose operations were suspended by regulators for liquidity woes.

The Financial Services Commission has halted operations of seven savings banks since January.

Among the potential buyers targeting the secondary banking businesses are KB Financial, Woori Financial, Shinhan Financial and Hana Financial.

Woori Financial has acquired Samhwa Savings Bank and the four contenders have their eye on six other savings banks.

Woori has also already expressed its intention to acquire one or two more savings banks. It plans to merge them with Samhwa Savings Bank to establish an entity with assets worth about 3 trillion won ($2.65 billion).

It has been rumored that Woori is considering launching talks to take over a subsidiary of the Busan Savings Bank group.

They include Busan Savings Bank, Busan II Savings Bank, Jungang Busan Savings Bank, Daejeon savings bank and Jeonju Savings Bank.

Jungang Busan Savings Bank has been mentioned as the main target of the four financial groups as it is headquartered in Seoul. Its assets and debt came to 846.4 billion won and 828.8 billion won.

Shinhan Financial and Hana Financial, which lost the bidding competition for Samhwa Savings, are mapping out strategies to win the coming bids.

KB Financial, which did not participate in the bidding for Samhwa Savings, is also set to be an active player. Its chairman Euh Yoon-dae has said the process to take over a savings bank is under way.

Savings banks saw their average default rate on soured construction project-related loans ― also known as project financing ― soar to more than 10 percent at the end of 2010.

By Kim Yon-se (kys@heraldcorp.com)