Bank consolidation, Korea-style: Asiamoney, February 2001

 BOX: THE GOVERNMENT VIEW

 Kap Soo Oh is assistant governor of the Financial Supervisory Service, an arm of the Financial Supervisory Commission (FSC) whose job it is to implement FSC policy. An eloquent man with a PhD from Wharton, Pennsylvania, he has become something of a front man for communication with the western media and bankers. Asiamoney visited him in late January in his Seoul headquarters – which were surrounded at the time by two rows of shield-bearing riot police.

 Asiamoney: Why does this idea of superbanks makes sense for Korea?

 Oh: Financial institutions are crucial for the economy. Without the right support from the financial system it may not be easy for the national economy to move on to a track of sustained growth. Consolidation is a trend globally, with banks wanting to enhance their financing ability and international competitiveness. In Korea after the crisis, the financial market essentially collapsed, and one of the reasons for that was the lack of such super and high quality banks. It may be much better for the economy to have a competitive international banking system. Korea is still quite heavily dependent on the financial system, although the capital market is growing rapidly.

 Asiamoney: These two mergers show very different concepts. Most of us are more familiar with the style of the Kookmin/H&CB merger. How involved were the FSC and FSS in orchestrating that merger?

 Oh: In the financial community there is a common understanding that we need consolidation in the banking sector. We have been encouraging it because it is necessary to enhance the effectiveness and profitability of these banks.

In that process we have two types of encouragement. One is for the kind of state-owned banks that receive a substantial amount of public funds. The government is the owner of these banks and their future is very much dependent on the decisions of the government. We are very actively involved in the formulation of their future systems. But for the other kinds of good banks, such as Kookmin and H&CB and others, it is up to them how to shape their future. It was their decision and they showed the intention to consolidate.

But the timing was the end of the year 2000 because that was the start of our so-called second phase of financial restructuring. At that time we announced the formation of the large financial holding company, incorporating Hanvit Bank and the others. That will trigger the remaining banks: although their financial position is quite sound, I think they will probably feel pressure to compete with them. That is why Kookmin and H&CB expedited their merger decision.

 Asiamoney: But with no pressure?

 Oh: Really no pressure.

 Asiamoney: The government will hold about 10% of the merged bank. Does that give you leverage over it?

 Oh: No, it will essentially be left to the management and the largest shareholders – Goldman Sachs owns about 11% of Kookmin, and ING Barings owns about 10% of H&CB. So they have a very strong voice. We cannot direct either of these two banks to move in a direction that we desire – if they do not agree there is nothing we can do.

 Asiamoney: Were you surprised by the level of labour union objection?

 Oh: I think it was unfortunate, particularly what happened in the chairman’s office of Kookmin Bank. But the behaviour of some employees from these two banks is quite understandable – because jobs are at stake, and anybody would do something to protect their jobs. But now they also understand that although they might go through quite substantial consolidation and organizational restructuring, the scale of reduction of staff doesn’t seem to be that large. I heard from the CEOs of these two banks that they will make that process of reduction quite manageable.

 Asiamoney: And you think that can work?

 Oh: I think so, yes, because these are very good banks, still generating a decent amount of profit. They can find a way to utilize these resources for the benefit of employees also.

 Asiamoney: Turning to Hanvit, why does a combination of ailing banks make for a better bank? Doesn’t it just make a bigger ailing bank?

 Oh: It is true that Hanvit and some of the others can be classified as ailing banks. Around the time of the financial crisis of 1997, we tried to assist them, recapitalize them and build up their balance sheet. I think they would have been born again as healthy but unfortunately another incident happened, the failure of Daewoo and others. Because of these unexpected incidents, the capital level that was supplemented by the government was not sufficient. But during that period of time operationally they had been trying many things to improve their governance system, credit culture, and the way they were handling decision making.

So when they have a sufficient amount of additional capital, I think they will be ready to go on again as a healthy and a good bank. That is now done. Now the capital adequacy ratio exceeds 10%. If restructuring measures are taken by these banks, Hanvit and the others will be in a good position to change themselves into a very competitive bank, even by international standards. It is really not a combination of ailing banks, it will be a creation of a new entity, because for these banks by the first quarter of this year the blueprint will be set. That will set out the new strategy for these banks in terms of their function, and also their future strategic areas of business operation like retail banking, corporate and global financing and so on, and they will consolidate with these other types of bank. By the first half of this year the whole picture will be drawn. It may take two or three more years to complete consolidation and reorganization, and when we go through that process they will be in a very good position to go on as a very good financial institution.

 Asiamoney: So you are talking about a merger, even if followed by a demerger into different core competencies. So what really is the difference between a holding company and a merger, given that this is your plan for the coming years?

 Oh: It’s a very tough question. We have seen many mergers and that’s the direct way of effective consolidation. But each country has its own culture and its own different types of consolidation. We have to consider many other implications of mergers versus the format of a financial holding company. In the end the overall impact will be the same, over a three or five year horizon. But during that period of time that consolidation will involve the handling of quite different vested interests, like employees and management and so on. Particularly when the issue relates to the employees – you have seen what happened in the Kookmin and H&CB merger. We would like to have consensus among employees of the different banks, and deriving that consensus may not be easy. So one of the reasons for choosing a state-owned holding company system is to smooth this period of time, and to avoid a conflicting situation among employees.

 Asiamoney: I understand that in releasing the public funds to each of these constituent banks in the holding company, the Korea Deposit Insurance Corporation (KDIC) insisted that first these banks had to reach agreement with their labour unions that they would support the restructuring process. Is that correct?

 Oh: That is correct, it was done at the end of last year, on the last day of 2000.

 Asiamoney: Was it difficult?

 Oh: Yes. But as I said, there is a consensus, and a general understanding that we must change. Any institution that uses public funds must be responsible for the appropriateness of using public funds. Labour unions understand that. It was a difficult process but in the end all the parties agreed.

 Asiamoney: Will Seoul Bank also join the holding company if it cannot be sold?

 Oh: That is a possibility, but nothing has been decided.

 Asiamoney: Who will be in charge of this holding company, and how will you reach that decision?

 Oh: The CEO and management group must have strong leadership, expertise and professional knowledge. There are many alternatives and options under consideration now. One possibility is to set up an independent recruiting committee, at the level of the public sector, so that they bring in qualified candidates. With a pool of qualified experts and objective members, the selection process will be more fair and transparent than otherwise. That is one option, among others.

 Asiamoney: Are you looking for someone with a banking or government background?

 Oh: I don’t know, I cannot tell. But he must have knowledge of the banking sector and financial community. These banks will be globally competitive so the CEO of this new financial holding company must be a person with good knowledge of the international financial community.

 Asiamoney: When will you reach your decision?

 Oh: Probably some time in March.

 Asiamoney: And when it comes to the government and KDIC’s exit strategy, is it true you plan to privatize in 2002?

 Oh: Our clear direction is to reprivatize the state-owned banks when the market is ready. It doesn’t necessarily have to be in the domestic market – it may be a strategic partner from overseas or may be the international market. It all depends on the condition of the financial markets and the availability of strategic partners.

 Asiamoney: Was it the FSC that announced this prospective date of 2002?

 Oh: I don’t think so. In my memory we did not set any specific date.

 Asiamoney: What about the reported deadline for the sale of Seoul Bank, within the first half of this year?

 Oh: They are doing their best. They will [complete their restructuring] by the end of this year, probably.

 Asiamoney: So you won’t set a hard deadline for its sale, if you can see signs of progress?

 Oh: Yes, we can see signs of progress, and if there is a possibility of finding a good partner, then I think it will be done. If not then some other option will be considered, including the financial holding company system.

 Asiamoney: Is the use of public funds to support ailing banks at an end?

 Oh: The first stage of this injection was completed on the last day of 2000, and now we will be watching progress. We have already allocated W40 trillion of public funds and another W10 trillion from recycled restructuring. I think all of the restructuring will be handled within that constraint. But if there is another need it may be possible that they may have more public funds.

 Asiamoney: To an extent it depends what happens to corporate Korea.

 Oh: Yes.

 Asiamoney: And you can’t really control that.

 Oh: You are correct. But the global economy seems not to be as bad as predicted by some, so the Korean economy should do well, and that will be very helpful to Korean corporations and financial institutions.

 Asiamoney: If you look forward a year, how do you expect the Korean banking sector to look, and the role of the FSC to change?

 Oh: In the second round of restructuring, with the use of public funds, we very strictly required self-rehabilitation efforts from banks. They will be moving to change their form and structure into the most efficient form to generate decent profits and earnings to compete with globally competitive financial institutions. There should be a significant level of consolidation completed in two or three years. By then you may see a few quite healthy and competitive banks in the country.

The role of the supervisory authority will be watching them grow, focusing on prudential regulation and any potential crisis management if that occurs. Our job will be very much lessened in the next few years. One of our goals in financial policy is to make the Korean financial markets one of the leading markets, at least in the Asian region. We will continue our open door policy, and also we will be deregulating and liberalizing the financial service activities in this country.