Banks swim against global trend of downsizing

Korean lenders in competition to launch financial groups for expansion


Korea’s banking industry is pushing ahead with expansion, seemingly running counter to the global trend of slimming down.

Major banks in the local market have established finance holding firms over the past few years and smaller players have followed or plan to join the move.

Following Nonghyup Bank, which launched a financial group early this month, Jeonbuk Bank, a provincial lender based in Jeonju, is poised to follow suit.

Jeonbuk Bank said in a statement that it has been in the preliminary stages to “convert its operations into a finance holding company, aimed at enhancing competitiveness via connection of subsidiaries.”

It plans to make public further details after mapping out concrete steps toward emerging as a financial group.

The bank, which recently acquired a capital services firm, may push for the takeover of an insurance firm and savings bank.

Before the 2008 global financial crisis, there were four financial groups in Korea -- Woori, Shinhan, Hana and Korea Investment (formerly Dongwon).

While global banking groups have been downsizing in the wake of the 2008 crisis, several more finance holding firms have been set up in the local market since then.

They include KB (the parent entity of Kookmin Bank), KDB (of the state-run Korea Development Bank), BS (of provincial Busan Bank), DGB (of provincial Daegu Bank) and Nonghyup (of the National Agricultural Cooperative Federation).

Two major foreign retailer banks -- Citibank Korea and Standard Chartered Korea -- had to join them under revised laws for the establishment of financial groups.

If Jeonbuk Bank successfully debuts, the number of financial groups will come to 12.

The Group of 20 discussed ways to prevent big financial firms from facing insolvency during their summit in Seoul in November 2010.

Under stricter regulations designed by G20 finance ministers, global banks are putting priority on risk management, shifting their earlier focus of expanding business territories.

Instead of the government injecting taxpayer’s money into insolvent banks, the Switzerland-based Basel Committee is devising methods under which their major shareholders will fully be held accountable.

U.S.-based Citigroup and U.K.-based Standard Chartered are also scaling down uncompetitive regional units worldwide, which could affect their Korean operations.

“There must be advantages and disadvantages in widening the scope of business territories under the wing of a finance holding firm,” an official of the Financial Supervisory Service said.

“It is also true that smaller banks could lag behind bigger ones as time goes on,” he said. “But reckless intra-group funding among affiliates in a large group could cause not synergy but a simultaneous drop in financial soundness.”

The FSS recently decided to crack down on irregular intra-group funding. Under the practice, a bank unit could be under pressure by its parent finance holding firm to provide its brokerage affiliate with bailout funds.

In the case of Hana Financial Group, its bank and brokerage units were both allegedly pressured to play a significant role as funding sources for the group’s M&A project to take over Korea Exchange Bank from Lone Star Funds.


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