Author: Tom Leander

OPPORTUNITIES IN BANKING

Given these pressures on businesses in many sectors, Korean banks’ struggles with asset quality come as no surprise. Bank exposure to lowering credit quality is more severe here than in other advanced economies, according to Graeme Knowd, the Japan-based associate managing director of the financial institutions group for Moody’s. By his reckoning, loans represented 73% of total assets of Korean banks at the end of 2013, while the average for other top industrial nations is between 40% and 50%.

But Jason Kim, bank equity analyst at KDB Daewoo Securities in Seoul, believes credit quality is slowly improving. “If you look at credit costs in Korea as a whole, they’ve been slowly diminishing following multiple rounds of corporate restructurings and at least five years of conservative provisioning,” he says. This sanguine view is seemingly belied by public indifference to recent privatization efforts. The government’s effort to sell its controlling stake in Woori Bank in a block sale worth about $2.7 billion was canceled on December 9 after only one bidder emerged.

The legacy of Korea Exchange Bank furnishes an example of how an institution under partial government stewardship can be transformed into a more competitive animal. Private equity group Lone Star bought a majority stake in troubled KEB in 2008, with the state retaining minority share. In early 2012, Hana Financial Group bought out Lone Star’s majority share and the minority stake owned by Export Import Bank of Korea.

KEB now occupies a largely unchallenged role in foreign exchange, accountable for more than 40% of all of Korea’s FX income. But it has continued to introduce new products that still gain it incremental market share. The bank has played a role in the internationalization of the renminbi by introducing FX products based on offshore renminbi, also known as CNH. These include CNH-denominated letters of credit as well as time deposits and money market products based on CNH. In an important recent development, and timed nicely with the public discussions over the FTA with China, KEB introduced its “Global RMB Loan” program in CNH, a suite of products to allow companies to manage import payments and to encourage Korean companies to invest in China directly.

According to Jin Uk Kim, manager of the financial institutions division at KEB, the bank’s top position in the market has helped it finesse the “difficult” business of introducing new FX products. “We continue to introduce three or four important new products a year. But in Korea, the banking market is highly regulated, making the structuring of new products complex.”

Innovation is emerging in the small to medium-size enterprise lending market, as well. Korean banks extend more credit to SMEs (42% of total loans) than to the nation’s biggest enterprises (14%). But this exposure also makes them more vulnerable to swings in SME fortunes. The smaller companies with export businesses—and in Korea that adds up to a lot—have higher exposure to the strong won because they are less diversified and have limited funding resources, compared with larger companies.

Hong Kong‒based fixed-income specialist SC Lowy sees an opportunity stemming from better risk pricing for lending to SME clients in Korea: The investment bank acquired Shinmin Bank in early 2014 in one of the first instances of a foreign company’s gaining a full banking license in Korea. The new owners renamed the bank Choeun, the Korean word for “good.” SC Lowy’s co-founder Lee Soo Cheon himself became the managing director of the bank, while Lee Ho-Jun, formerly CEO of private equity firm Yuli PE, who also worked in the investment banking division of the Korea Development Bank, heads day-to-day operations as chief executive.

Why take on a savings bank in a country where banks are struggling? “It has upside potential for us,” says Lee. “It gives us long-term access to the Korean domestic debt market, as well as providing a local serving platform for our Korean assets.” The bank will focus on building its product offerings to capture more SME business—an increasingly sought-after segment by banks of all sizes across Asia as the region’s economy expands.

Korea is just the place to do that.

Source: http://www.gfmag.com/magazine/january-2015/south-korea-tightrope-WALK-WITH-TRADING-PARTNERS?page=2

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