Banking: Raising the Bar Can Hurt

Korea First's CEO ushered in accountability. Now, he's out

When Wilfred Y. Horie arrived in Seoul less than two years ago, he took the place by storm. Named CEO of ailing Korea First Bank, the Japanese-American was the first foreigner to run a Korean financial institution. Horie, who came from Associates First Capital Corp. in Japan, made it clear that profits and transparency, not politics, would govern Korea First's decision-making. In January, 2001, he drove the point home by rejecting a government request to help bail out failing companies. His results won him respect. Korea First turned a net profit of $236 million in 2000, compared with a loss of $773 million in 1999. As recently as August, Horie projected a $310 million profit for 2001.

Then in late October, Horie abruptly resigned. The 55-year-old insists he just wants to go home to Hawaii. No one believes that. Korea First bankers privately say that California-based Newbridge Capital Group, which holds 51% of the bank, was unhappy with Korea First's shrinking assets, slow restructuring, and the $339 million in bad loans that Horie had accumulated. The bad loans may be especially galling to Newbridge, given that when Horie took over, the bank had a clean balance sheet after a $12 billion injection of public funds.

Did Horie renege on his pledge not to make politically motivated loans? Horie denies it; Newbridge officials wouldn't comment. Yet in November, 2000, Horie agreed to lend $77 million to sinking chipmaker Hynix Semiconductor Inc. as part of a $615 billion syndicated loan. That raised Korea First's exposure to Hynix, which the government is eager to save, to $212 million. At the time, "Hynix was the best example of corporate restructuring," Horie says. Indeed, Hynix CEO Park Chong Sup came in as a reformer. He separated the chipmaker from troubled Hyundai Group and sold noncore assets. Unfortunately, chip prices kept plunging, as did Hynix' profits. Increasing Korea First's exposure to Hynix turned out to be a bad call.

Sources say Newbridge executives were also concerned that Korea First wasn't growing enough. Its assets were $20 billion at the end of September, down from $24 billion when Horie came on and less than two-thirds what they were before the 1997-98 Asian financial crisis. That put the bank at a disadvantage in a newly competitive market. Healthy, well-managed rivals have bulked up. Hana Bank, for instance, has twice the assets of Korea First. In 1996, it was a third its size.

"A WALL." Size and economies of scale are increasingly important in banking. Once a commercial bank that lent heavily to now-bankrupt conglomerates, Korea First pushed into the fiercely competitive retail market, especially mortgages, where a large network and asset base are key. "Despite Horie's retail strength, his mortgage-oriented strategy was bound to hit a wall, given increasing competition on that front," says a senior Korea First manager who asked not to be identified. H&CB and Kookmin Bank, which merged on Nov. 1, have seven times the assets of Korea First. "Korea First used to be one of the biggest banks in Korea," says Paik Woon, banking analyst at Samsung Securities. "Naturally its profit growth will be limited when it is clustered among the smallest."

Now, Newbridge may want to broaden the bank's focus to lift profitability. Horie's successor is Robert A. Cohen, 52, a bank director who spent most of his career at Crédit Lyonnais and Republic Bank of New York Corp. He has both commercial and retail experience.

For some analysts, Horie's departure, like his arrival, is a milestone for Korean banks. It signals that executives even as charismatic as Horie are accountable to shareholders, a revolutionary idea in Korea. "Korean executives have never been held responsible for their wrong moves," says economist Kim Sang Jo at Hansung University in Seoul. "Horie's saga is changing that notion."

The tale also shows how far Korea has come in cleaning up its banks. With a much-improved average capital adequacy ratio of 11%, banks are "no longer risks to the system," explains Shin In Seok, a senior research fellow at the Korea Development Institute, a government-funded think tank. Of course, good banks can still disappoint shareholders. That risk capitalism never wipes away.

By Moon Ihlwan in Seoul with Mark Clifford in Hong Kong

— With assistance by Mark L Clifford

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