The growing presence of overseas investors in South Korea is perceived as a mixed blessing, as the country is torn between wanting to be a regional hub and fleeing for cover from the “foreign dominance”.
On the one hand, Asia’s fourth-largest economy is desperate to redefine itself as the gateway to the region, but on the other, it lives with the gnawing fear of the country being overrun by foreigners.
Among the primary concerns is the rapidly diminishing ground of Korea’s domestic players.
As of the end of 2003, overseas capital in the financial sector accounted for 26.7% of aggregate assets, a figure that is the highest among Asian countries in a list compiled by the 2003 World Bank Regulation and Supervision Survey. Overseas capital took up 14.5% of the securities industry and 10.5% of life insurers.
Foreign-owned banks’ assets have steadily climbed as well, growing 0.4% in 2003 to boast a 6% market share, according to Bank of Korea figures.
Foreign know-how
As in the case of Hong Kong and Singapore, international investors bring with them wider expertise and world-class financial tools, which translate into savvy new services for consumers. To stay up to par with the increasingly sophisticated demands of consumers, domestic financial institutions have been galvanised into renovation.
Kookmin Bank, the nation’s largest retail bank soaking up 40% of all consumer loans, and Hana Bank, have vowed to forge ties with global players, reflecting the fear the sector isexperiencing due to the presence of foreign-owned enterprises.
The two were stung by US-based Citigroup’s planned buyout of KorAm Bank. “[Citigroup’s takeover] is great for KorAm, which has been given a chance to join up with a global bank, but for the rest of the lenders, it could mean a loss of potential profits,” says Scott Seo, banking analyst at JP Morgan Chase Securities.
On the government side, regulators are also forced to keep on their toes to stay ahead of the market, says the Financial Supervisory Service, South Korea’s financial watchdog, formed in 1999 in the aftermath of the 1997-1998 economic crisis.
The job is not an easy one, as regulators point out that although foreign-held financial institutions never fail to act within the legal framework, they are seldom willing to bend their rules for national crises, such as the one involving LG Card Co, once an industry leader.
Citing market principles and credit regulations, Korea Exchange Bank (KEB) failed to contribute to the bail-out for the debt-riddled credit card firm. But riding on industry-wide efforts, KEB became one of the beneficiaries of the Won500,000bn ($4.5bn) doled out by the other domestic banks and the state-run Korea Development Bank.
Another argument that rears its head is that the overheated competition threatens the profitability of “full-blooded” South Korean lenders.
In a report issued by the Bank of Korea (BoK) last year, foreign-owned banks were several notches above domestic players in terms of profits and corporate governance.
But because foreign financial institutions are exceedingly loathe to undergo risks, the central bank said that corporate Korea may bear the brunt as it may be unable to access much needed loans for investment.
Household loan bias
BoK findings show that foreign players continue to leverage their portfolios toward household loans. As of the end of last year, in contrast to the 35.2% increase in household loans, corporate loans accounted for 33.3% less of their aggregate outstanding loans.
To even out the playing field for domestic lenders, BoK has proposed selling the remaining government stakes to South Korean institutional investors through block sales.
Out of the foreign investors trying to take a bite out of the country’s financial sector, the most celebrated is expected to be Citigroup. The world’s largest financial group is planning to take over the 36.6% stake held by US-based Carlyle Group in KorAm Bank, the sixth-biggest lender in the country.
The takeover would create a unified bank with assets topping Won70,000bn, ranking number three in the industry behind Kookmin and Shinhan Financial Holding. Citigroup emerged a winner in a two-way bidding process, beating Standard Chartered.
Private equity funds are eyeing South Korea, as well. Temasek Holdings of Singapore is seeking additional shares in Hana Bank, while the UK’s largest pension fund manager Hermes Investment Management and Wellington Management from the US are also seeking a foothold.
Wellington and Hermes hold 5.03% and 0.5%, respectively, in SK Corp.
“The success of Sovereign Asset Management Fund in SK Corp is attracting an increasing number of private funds from abroad, all seeking to shore up corporate governance to maximise profits,” says Kim Se-joong, a researcher at Dongwon Securities.
Sovereign Fund, the second-biggest shareholder in SK Corp with a 14.99% stake, reported impressive profits and recently confirmed its commitment to promoting sound corporate governance through its persistence in ousting SK Corp’s owner family, accused of unethical business practices.
The Monaco-based investment fund lost the battle when local shareholders elected the SK Corp nominees to the board, but Sovereign continues to emphasise transparent practices based on global standards.
Not all are profitable, however. Templeton Management Fund, an orthodox fund based in California, suffered considerable losses from its LG Card stocks.
European investors, meanwhile seem to be gradually pulling out, or at least not making new investments compared with their US and Asian counterparts.
During the first three months of this year, foreign direct investment (FDI) was spearheaded by the US and Japan, in sharp contrast with the more than 60% decline in direct investment from the EU.
The Financial Supervisory Service hinted that mostly Asian private equity funds are poised to enter the market during the second half of the year.
Overall, FDI stood at $3.04bn, posting a gain for the first time in 15 months.
Future at stake
In spite of the fears and doubts, however, policy makers agree that Korea can no longer to afford to shun foreign investors.
“We are aware that the increasing foreign capital is not going down well with many, but we also know that we can’t keep our doors locked and want to become a regional hub at the same time,” says Cho Ki-jun, head of the Bank of Korea’s Banking Department.
As a nation where exports account for 60% of the GDP, South Korea simply cannot risk its overseas ties. Jason Shin an analyst at Morgan Stanley in Korea, stresses that foreign investors are here to profit, not to steal.
“In order to raise profit, they need to become profitable, and to become profitable, they have to remove unnecessary risks, promote sound corporate governance and commit significant, long-term investment in their enterprises,” he says.
Morgan Stanley acted as lead manager for Texas-based Lone Star Fund’s buyout of a 51% stake in Korea Exchange Bank.
If anything, experts say South Koreans should be distributing more invitations to overseas investors.
“It should soon become pointless to distinguish between foreign and locally-owned banks,” says Robert Cohen, head of Korea First Bank. US private fund Newbridge Capital owns 48.9% of the bank and according to the French-born CEO: “It matters only whether the companies realise revenues, as that is what they are out to do.”
Foreign banks’ impact
Assisted by a speedy restructuring process and a rush of foreign capital, South Korea’s banking sector is finally hobbling toward sophistication, says the banking division head at the Financial Supervisory Service (FSS), Korea’s financial watchdog.
Hit by a string of corporate malfeasance, namely the Won5000bn bail-out for debt-riddled LG Card, a nationwide credit hangover and the SK Corp scandal, it was beginning to look like Asia’s fourth-largest economy was about to be sucked into yet another economic black hole.
Thankfully, it survived the bad times, and looking back, the watchdog agency believes the previous problems have strengthened the local financial industry.
“We’ve been there and done that. By learning from our mistakes, we are nurturing stable and competitive financial institutions that can better contribute to the country’s economic health,” says Chung Sung-soon, head of the FSS, in an interview with The Banker
Another factor that has bolstered the economy is foreign capital, Mr Chung says, stressing that South Korea must leave the welcome mat out for global players who bring with them world-class standards and best practices.
The South Korean banking industry is one of the most deeply penetrated by foreign investment, meaning they are the most exposed to international practices and sophisticated financing tools.
However, problems remain, as seen by the stark contrast in the net profit posted by foreign and domestic banks.
In 2003, the 33 foreign bank branches saw a 38.8% increase in their combined net profit by posting Won411,000bn. The figures become significant when compared with the 63.4% decline in the net profit of the 19 locally-owned banks.
Deutsche Bank led the herd, followed by HSBC, Citibank, UBS and JP Morgan-Chase.
The aggregate assets of the foreign bank offices stood just short of Won70,000bn, up more than 25% from 2002 to boast a 6% market share.
Mr Chung says he hopes this excellent performance will act as a stimulus for growth for the rest of the sector.
“Good corporate governance, transparent business, greater expertise, wider business scope; these all come with the overseas investors, so we would be extremely backward if we limit or block their entry based on groundless fears,” he says.
