Foreign Finance Companies Might Dominate the Korean Market

“It is possible that foreign banks will dominate the domestic bank market. I’m concerned about how the Korean finance industry will be doing in 10 years,” said Kim Seung-yu, chairman of Hana Bank.

“Korean securities depend almost solely on transaction commissions as their source of income. It would be hard for them to last long with 19th Century-style management,” said a head of a foreign financial company.

These are warning signs that Korean financial companies would have to give the initiative in the market to foreign companies equipped with advanced financial skills if Korean firms avoid restructuring and keep anachronistic management systems. If the finance sector does not function well, the growth engine of the Korean economy is bound to weaken.

Bank Expansion Lacking in Substance-

Judging from indexes, Korean banks seem to be successfully implementing restructuring. The number of banks declined from 33 in 1997 to 19 in the end of June this year, meaning as many as 14 banks or 42.4 percent disappeared within six years. The number of bank employees also decreased from 113,994 to 89,511 during the same period. Apparently, the bank sector pulled off its “expansion” by mergers and restructuring.

However, experts in the finance sector criticize that there are no signs of improvement in terms of product development and risk management.

Korean banks have a vulnerable structure to external factors like the change of economic situation or interest rates, as they are highly dependent on loan businesses and interest profit.

Han Sang-il, research fellow of the Korea Institute of Finance pointed out that major domestic banks, including Woori and Kookmin Banks, failed to bring about synergy in terms of cost saving, seeing their sales management costs increase after mergers.

The Secondary Finance Sector is Worse Off-

Stocks were actually immune from restructuring. The number of security firms increased rather than decreased, from 36 in late 1997 to 42 in the end of June this year. The number of personnel also went up by around four percent.

But it became more difficult to gain profits through a management dependent on commission. As competition got fiercer, the commission rate almost halved from an average of 0.33 percent in 1999 to 0.17 percent in late 2003.

In the profitable industrial banking (IB) sector, including M&As, IPOs, and company bonds, foreign securities firms dominate.

The number of insurance companies dropped from 45 in late 1997 to 36 in June of 2004. A total of 12 life insurance companies were kicked out of the market. However, the insurance market has already been saturated, and there is also mounting pressure of additional restructuring due to foreign insurance companies making inroads into the market and the implementation of bancassurance, an insurance project associated with banks.

Is It Possible to Endure All-out Attacks from Foreign Companies?-

All-out attacks from foreign finance company are ever increasing in all parts of the finance sector.

The control of management in three out of eight domestic retail banks are now in the hands of foreign capital: the Korea First Bank controlled by Newbridge Capital, the Korea Exchange Bank controlled by LoneStar, and the Hanmi Bank controlled by Citibank. Other major banks like Shinhan Financial Group, Kookmin and Hana banks have 60 to 70 percent of their stake in foreign hands.

In the insurance sector, MetLife and AIG, two American companies, and ING, a Dutch company, are aggressively increasing their business. In the trust investment sector, Fidelity and Prudential, the world’s largest asset management groups, are poised to compete for a 180 trillion won asset management market.

Countermeasures-

“Which comes first, expansion or substance, like enhancing risk management ability?”

There are somewhat mixed proposals among finance experts at home and abroad to save a finance industry on the verge of collapsing.

Ji Dong-hyun, research fellow at the Korea Institute of Finance, stressed that survival of the bank industry hinges not on enlargement, but on the ability to meet customers’ demands by introducing quality products and services as early as possible, just as is the case with the manufacturing sector.

On the other hand, Lee Byung-nam, vice president of the Boston Consulting Group, pointed out that it is hard to expect a sound investment culture and development of stock industry in a structure where tens of securities are vying with one another. He also added that it is hard to understand to say that the finance sector is different while seeking expansion in the manufacturing sector.

Yoon Gyeong-hee, a Korean representative at ABM AMRO, said that the domestic finance market is saturated and therefore companies should find overseas market after expansion to survive.

Kang-Woon Lee kwoon90@donga.com legman@donga.com