South Korea: A Great Place To Be A Bank

In South Korea, profits are soaring from smarter consumer lending

Everyone is familiar with the shining success in recent years of South Korean companies like Samsung Electronics Co. and Hyundai Motor Co. But another set of Korean companies is thriving more quietly -- and attracting savvy foreign investors by the planeload. These winners, much to the surprise of those who recall the Asian financial crisis of the late '90s, are South Korea's banks.

The numbers tell the story. The country's 19 banks are expected to post combined net earnings of some $9.5 billion this year, topping last year's record profits of $8.4 billion, according to the government's Financial Supervisory Service. They have succeeded thanks to reforms that have opened up the banking world to foreign investors and helped to consolidate and restructure the industry. The biggest change: Banks are largely no longer handmaidens to the chaebol, South Korea's big conglomerates. Loans to these large borrowers have dropped from 23% in 1998 to just 5% today, while loans to consumers have grown to 56%, up from 32%.

As a result, profits are up and bad loans are down, especially at the Big Four -- Kookmin Bank (KB ), Shinhan Financial Group (SHG ), Woori Financial Group (WF ), and Hana Bank -- which now control 70% of the market. For the overall banking sector, the average ratio of nonperforming loans to total assets stands at 1.6%, down from 12.9% in 1999. Investors have noticed. The index tracking Korean bank shares on the Seoul bourse has risen 52% this year, outpacing the market's 32% gain. Woori, a product of a merger between two troubled nationalized banks, has jumped 93%.

Among the biggest beneficiaries are foreigners, who have snapped up bank shares via portfolio and direct investments. Three of the top four banks -- Woori is the exception -- are now majority-owned by foreigners, although they are run day-to-day by local managers.

In one recent foray, Goldman, Sachs & Co. (GS ) announced on Oct. 3 plans to invest up to $550 million for a 9.4% stake in the holding company that controls No. 4 lender Hana Bank. That comes after Goldman more than doubled a $538 million investment in Kookmin dating from 1999, when it sold an 8.96% stake to a large group of institutional investors in 2002 and 2003. Its latest bet comes after Standard Chartered PLC (SCBFF ) bought Korea First Bank for $3.3 billion earlier this year.


Of the six banks nationalized after the financial crisis of the late '90s, four have been reprivatized. And a succession of mergers and acquisitions has shrunk the number of retail banks from 27 to 11. Most important, new management teams have vowed never to repeat their predecessors' mistakes. Creditworthiness and transparency are now the watchwords of the industry. "Comparing Korean banks now with the pre-1997 crisis is like comparing apples and oranges," says Ha Yung Ku, CEO at Citigroup's local unit in Korea, which paid $2.7 billion for No. 7-ranked Koram Bank last year.

A major difference between the old banks and the new is tougher risk assessment. "It took years to make our employees and then clients accept the very idea of credit assessment," says Yoon Jae Kwan, head of Kookmin's Seoul branch. But analysts and investors say the growth story has been even more important than limiting losses. The days of depending on plain-vanilla loans are over. The banks' goal is to become nothing less than one-stop financial supermarkets, offering everything from credit cards and brokerage services to asset management and insurance. "Future growth will be in nonlending businesses," says Lee In Ho, CEO of No. 2-ranked Shinhan.

The foreign incursion doesn't please some Koreans. But the new financial order that has allowed banks to flourish is welcomed by all.

By Moon Ihlwan in Seoul

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