Economist Korea Presentation 2-1-05 by fanzhongqing


									The Korean Banking Sector:
   “Are we there yet?”

        February 1, 2005
         Origins of the System
• A key part of the Korean economic miracle of
  the 1960s-90s.
• Reliable source of cheap credit to targeted
• Government allocation of credit is the
  centerpiece of national economic policy.
• All is hunky-dory until ~1993.
                The Big Bang
• Overinvestment and poor allocation of capital
  lead to sub-par investments
  – Chaebols enter various uncomplementary
  – Political favor counts for more than high potential
• Corporate cash flow turns very negative
• Banks with thin margins can not sustain bad
  debt write-offs
                  The Shakeout
• Collapse of major Daewoo, Hyundai companies is
  the final blow.
• More than half the banking industry fails; the
  remainder is badly shaken.
• Major consolidation of bad banks (ex: Woori
  Financial) and bad assets (KDB, KDIC) takes place.
   – Commercial banks go from 33 in 1997 to 19 in 2004.
   – Merchant banks go from 30 to 2 over the same period.
• Over $150bn in government funds injected.
                The Double-dip
• Having long shunned consumer lending for corporate
  loans which have proven lethal, Korean banks begin
  to throw credit at the consumer.
   – Average bankable Korean has 6+ credit cards by YE2003
• The credit cycle turns abruptly but inevitably after 4
  years of 100%+ growth.
• Virtually every credit card company goes bankrupt,
  including all of the big 3: Kookmin CC, LG Card, and
  Samsung Card.
           Where are we now?
• Four major domestic bank groups:
  –   Kookmin
  –   Shinhan/Chohung
  –   Woori FG
  –   Hana
• Three large foreign-owned players:
  – KorAm (Citibank)
  – KFB (Standard Chartered)
  – KEB (Lone Star)
    Competitive Pressure Rising
• Citi and StanChart have largely clean entities
  to build on.
• HSBC, DBS, JPM, and Barclay’s are also
  looking to buy in or start aggressive local
• Domestic banks’ product offerings & skills are
  still weak.
             Financial Position
• Domestic banks still distressed by global
  – Reported NPLs of 2.37% are probably close to 6%
    on an int’l standard basis
• ROA of 0.74% (9mos04) is low vs global avg
  of 1.31%
• Deposit rates still very high by Asian/world
  – 91d CD rate is 3.5% in Korea, vs. 0.25% in Sing.,
    0.01% in HK
            Constrained Growth
• Consumers remain over-geared
• Strong exports will continue to create capital
  investment; however…
• Business expansion is increasingly funded by internal
  cash flow or by borrowings in the international
  capital markets.
   – When banks fight the bond market, the banks lose
• Low capital adequacy ahead of Basle 2 means that
  banks have limited capacity for expansion anyway.
       What’s the way forward?
• Banks must focus on “asset-light” activities:
  – Loan origination, not necessarily loan warehousing
  – Move excess deposits into investment products
     • Mutual funds
     • Insurance
• Originate smarter products with more “value-
  add” for customers
  – Fixed rate and offset mortgages
  – Revolving credit cards
       The way forward (cont.)
• Higher capital efficiency will remove the threat
  of further involuntary consolidation
• The presence of foreign banks will be a
  constant worry for laggards
  – Market share losses
  – Threat of acquisition
            Some Final Thoughts
• Don’t count out the non-banks
   – ITCs and brokers could also capture consumer investment
     dollars if banks stumble
   – Consumer finance, leasing, and cards will all be
     back….perhaps with foreign backing and management skill
• Don’t automatically bet the foreign banks
   – Citi, HSBC, and StanChart have all stumbled before in new
   – Domestic banks will copy innovations and poach well-
     trained staff more quickly than anyone thinks

Paul Sheehan
  +852 9192-3105

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