Online Extra: For Shinhan, Survival Through Growth
The 1997-98 economic crisis in Asia jolted South Korea's financial industry, with the top five banks teetering on the edges of bankruptcy (see BW Online, 10/12/05, "The Dollar: No Devaluation Déjà Vu").
Their best clients had been the country's chaebol, or conglomerates, which had relied on borrowing to fund breakneck expansion to diversified business areas including cars, ships, radios, and microwave ovens. Bad debts soared in the banking sector as some of the manufacturing behemoths folded at a time of soaring interest rates.
No Korean bank better capitalized on the volatility in the financial industry than Shinhan Financial Group (SHG ), which started out in 1982 with just two branches and 250 employees (see BW, 4/17/01, "Korea's Credit-Card Mess Needs a Clean Sweep").
Shinhan boasts a winning streak of buyout deals over the past five years to expand its business in such areas as credit cards, brokerage services, asset management, and insurance. A key reason for the expansion was Lee In Ho, who took over as CEO of the group in May. Recently, Lee spoke with BusinessWeek Seoul Bureau Chief Moon Ihlwan about how Shinhan plans to keep on growing. Edited excerpts of the interview follow:
What made Shinhan stand out among Korean banks?
Our focus on basics has paid off. Although we were a tiny bank in the 1980s, we managed to create a culture of respecting basic rules of rewarding people in accordance with their performances and making loan decisions based on business soundness and risks. That helped us win confidence among customers and investors at the time of crisis. Everybody had a difficult period, but fortunately for us the crisis gave us opportunities for growth.
Takeovers appear to have been the key to your growth strategy. What do you want to achieve through these takeovers?
Having survived the crisis, it has become vital for us to increase size and broaden our services in order to compete in a new environment where lending and taking deposits won't be a deciding factor in the business. Our plan to re-create our bank has been clear since we formed a holding company in 2001 to bring various financial services together to offer them to our clients through a single channel.
We took over Chohung Bank in 2003 to create a comprehensive channel to reach all the clients we are targeting. We also took over Good Morning Securities in 2002 to merge it with Shinhan Securities and have decided to bring under our umbrella Shinhan Life Insurance while beefing up our credit-card and asset-management arms.
What's the most pressing task you are facing now?
We need to integrate our two banks, Shinhan Bank and Chohung Bank, into one, which will be the main channel to offer our services. The merger, if completed next spring as scheduled, will create the country's second-largest bank, with 930 branches, which will be comparable to Kookmin Bank's (KB ) 1,100 branches [Korea's largest bank]. Then we can start reaping the benefits of our recent acquisitions.
I think contributions to profits from nonbank services will rise to some 25% next year from less than 10% this year. The target is to increase the portion to more than 30% quickly.
What do you think is the area with greatest growth potential in Korea's financial services?
Although we see growth in all nontraditional banking areas, the asset-management business has the biggest potential. With the local stock market rallying of late, brokerage activities will probably generate significant earnings in the immediate future, but the growing needs for wealth management will make the business bigger in the not-too-distant future.
In fact, the asset-management industry is just beginning to grow, and that's why it becomes increasingly important to offer one-stop services with products tailored to individual needs.
What's your mid-term goal?
Our vision is to create a world-class bank with all best-practice systems in place. I believe our track record of growth will help us emerge as the No. 1 financial group by 2008. We only had two branches when Shinhan Bank was set up in 1982. Not many banks with such a short history have taken over a bank [as Shinhan did with Chohung Bank] with history of more than 100 years (see BW, 8/22/05, "The Great Bank Overhaul").
Our target is to increase our assets from $168 billion last year to more than $240 billion in 2008, our return on equity from 15.8%, to more than 20%, and our market capitalization from $6 billion, to more than $19 billion.
Do you have any plans to expand overseas, particularly in Asia?
We can't compete with foreign banks unless we internationalize our perspectives. The intensified business activities by Citigroup (C ) and Standard Chartered Bank, which have taken over Koram Bank and Korea First Bank respectively, will also lead to fierce competition. On our part, we will globalize our branch operations, particularly in China and other Asian nations.
We'll remain active in looking for fresh business opportunities in China. But our role will largely be serving Korean companies operating in China and the region, instead of trying to localize our operations for local customers.
What will be Shinhan's core competence?
Human resources are the most important assets of our bank. Services are offered by people, and their skills, creativity, and attitude make all the difference. That's why we have been constantly training our employees. We also work together with consulting companies such as Towers Perrin and Mercer to find ways to better manage our human resources. All our employees will have to spend an average of 90 hours for retraining this year.