Online Extra: Q&A with Korea First Bank's Wilfred Horie

Banks need to exercise independent credit decisions -- a radical stance in South Korea, where Horie resisted government pressure to bail out shaky companies

Wilfred Y. Horie is one of the most closely watched figures in South Korea's financial industry, partly because of his reputation as a banker who can say no. In an unprecedented move, his bank rejected government requests to bail out some troubled corporations earlier this year. Horie, the Japanese-Amercian chief executive officer of Korea First Bank, has already made history as the first foreigner to run a Korean bank when he took the helm at the start of 2000. Horie discussed his strategy and the challenges that lie ahead with BusinessWeek's Seoul Correspondent Moon Ihlwan. The following are edited excerpts of their conversation:

Q: What are the major achievements the bank has made since you took over in January, 2000?

A: The significant achievement we made is a complete reorganization of the management structure at the various departments. It's something that many people thought would be extremely difficult to do. We've done that. I think more importantly, the employees have learned to embrace the change because that's one of the biggest challenges for any kind of restructuring. You have this plan, but unless you can get the employees to buy into strategies and changes, it's very difficult to implement. I have to give credit to the employees for really stepping up to embrace the changes that we decided to implement.

Q: What was the main problem of Korea First Bank?

A: Employees needed to change their mindset. They had very limited knowledge of how a bank really makes money, what's the customer expectation, and how you satisfy customers. Basic subjects like that were developed as part of our training program. In the past, the branch network was purely designed for deposit gathering. They wanted customers to come in and make deposits -- that's all. They never asked to cross-sell loans, credit cards, or whatever. So people were coming in because they were listening to the overall government policy of working hard and saving.

Q: How do you see your bank three to five years down the road?

A: If you take the size of the portfolio today, we have about 5 trillion won [$4 billion] in large corporate [loans] -- that's just under 50% of the total. Over the next three to five years, that amount would remain relatively flat. The bank really didn't have a focus on the consumer, so that portion will start to grow with mortgages. Small- and medium-sized enterprises [SMEs] were really not a focus of the bank because money went to large chaebol companies. So that's a business space that we need to play catch up.

The consumers and SMEs will probably take up about 75% of the total business. We will reduce [the size of] large corporate [loans] down to 20% to 25%, depending on how rapidly other portfolios grow.

Q: How do you plan to build up your retail business?

A: We will see [to it] that mortgage products [become] the cornerstone of our consumer-banking business. That's because if we take a commercial banker and say "O.K., you're going into consumer product," it's very difficult to make that transition since our loan officers are used to looking at larger-size transactions with security and lower interest rates. So the mortgage product has sort of those characteristics. It's a larger-size transaction, it has security, and basically it's a lower-rate product. Now we have more information about the customer, and that allows us to have more confidence in selling other products such as car financing and credit cards. We have the ability to do what I call increasing the "wallet share of a customer."

Q: From Korea's point of view, one of the main objectives of inviting foreign investors to run a local bank was to advance the level of the local banking industry. In what ways do you think your management team is changing Korea's banking system?

A: Firstly, I have stated that banks need to be profitable in order to pay for credit expenses, to establish adequate loss reserves, and absorb net losses. Strong financial discipline toward control of expenses and informed pricing decisions are now the norm -- it wasn't [this way] in the past. We've installed a rigorous risk-management process throughout the bank, especially in credit underwriting.

Q: What's your view on the recent government move trying to force banks to buy bonds to roll over debts issued by risky companies?

A: The government often tries to get involved to insure liquidity to "Corporate Korea." Consequently banks are asked to participate in these initiatives. I believe banks need to exercise independent credit decisions in analyzing credit risks before participating in these transactions.

Q: Do you have any plan to list Korea First Bank in the future?

A: This is a significant joint venture between a private company and the government. Hopefully, we'll be able to set a very solid track record of performance improvement so that everybody will want an equity stake in this bank. We hope that when we do the IPO, values will be way up there! In order to do a successful public offering, we need to have continuous, consistent performance improvement -- no surprises. And that's what we'll do. Maybe 2003 or 2004 will be when we'll have that opportunity. You need to have at least three years of a real solid track record before people will say: "Yes, there's no puff in this performance."

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