South Korean financial groups realign, but find themselves at turning point

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SEOUL, Nov 7 – Some of South Korea’s big-name financial groups will have disappeared by the end of this year through breakups and mergers, but behind such moves ostensibly aimed at improving efficiency, industry watchers say the very system of operating financial groups needs to be rethought.

Former No. 1 Woori Finance Holdings Co. was absorbed into Woori Bank on Nov. 1, and KDB Financial Group Inc. will be merged with Korea Development Bank (KDB) on Jan. 1. The breakup of the two state-owned banking groups is part of government-led plans to privatize Woori Bank and reorganize the policy financing KDB.

On Oct. 31, Citigroup Korea Inc. was merged with Citibank Korea Inc., and once Standard Chartered Korea is disbanded by the end of this year, Standard Chartered Bank Korea will represent the group.

“As Citibank Korea accounts for 97 percent of Citigroup Korea’s assets and business, the merger is aimed at simplifying the governing system and enhancing managerial efficiency,” said Shin Hyeon-Jeong, a spokesperson of Citibank Korea.

With the four out of the picture, the number of financial holding companies in South Korea drops to nine.

Some see this as a signal that the era of financial holding companies is fading, arguing that the system is no longer necessary from the perspective of improving fficiency.

Financial holding companies were first introduced in South Korea in 2000 in the aftermath of the 1997 Asian foreign exchange crisis in a bid to create synergy and maximize profit by putting banks, brokerages and insurance firms together into a group.

“The initial slogan of financial holding companies was rearing non-banking sectors and diversification of portfolio. They thought the system would spur mergers and acquisitions (M&As) in insurance and securities industries,” said Ku Yong-uk, a senior analyst at KDB Daewoo Securities Co.

After more than a decade, however, only flagship banks have become bigger and bigger, accounting for around 70 percent in profits and assets of their parent companies who, instead of raising their competitiveness or venturing into new businesses, settled for retail banking that guaranteed them stable profits.

Shinhan Financial Group Co. leads the industry with 401 trillion won (US$368.98 billion) in assets and 1.7 trillion won in net profit as of end-September. Its flagship Shinhan Bank contributed 68 percent to assets and 67 percent to net profit, respectively.

Runner-up KB Financial Group Co. has even higher dependency on Kookmin Bank, which accounts for 67 percent in the group’s assets and 75 percent of profit.

Such imbalance has caused managerial problems between the holding company and its weighty bank. The group’s head tries to wield influence on its affiliate, but the powerful banking unit wants no interference and often snubs the parent firm.

This was blaringly evident in the KB Financial scandal, a textbook example of the power struggle between the chiefs of KB Financial and Kookmin Bank using an expensive computation system change as a proxy. The infighting forced intervention of financial oversight authorities, and both ended up having to resign.

“But it’s too early to say that the dissolution of the financial holding company is a ‘trend,'” said Ku from KDB Daewoo Securities. “Woori Finance and KDB Financial are state-owned organizations. Their dissolution was a government decision, not a market choice.”

As for Citigroup Korea and SC Korea, he argued that they decided to downsize and focus on retail banking business because they weren’t doing well in South Korea.

Citibank Korea has closed 56 of its 190 branches across the country this year as part of its restructuring plan.

“The holding company system itself is a good model to encourage financial firms to have diversified portfolios,” the analyst said. “But it is a matter of management.

Leaders of the banks have basked in stable interest income from retail banking business but never bothered to seek new profit sources.”

The Financial Services Committee (FSC), the top financial regulator, also thinks the current financial governing system is necessary to improve competitiveness in the South Korean financial industry.

It removed regulations that banned holding company officials from taking managerial positions in its affiliates and allowed operation of “open bank offices” that provide consolidated services of banks, insurance and brokerage to customers.

“The holding company system can create synergy through M&As, closer business coordination among its affiliates and better customer service,” said the FSC.

“The companies have to make efforts to attract their bank customers to their brokerage and insurance services and instruments. This is the first step to producing the synergy effect of the financial holding company system,” said Ku.