H&CB has just started to let investors know that it will no longer lend to large corporates. It says that the risk-adjusted return on capital does not make that business worthwhile. This strategy, of course, has big implications for corporate Korea - which is still dominated by large corporates, known as chaebol. H&CB will stop lending to the top 30, and more broadly, to any corporate that taps the domestic bond market.
Whether this vision will be carried forward when (or if) H&CB merges with Kookmin, is not certain. That, in part, may come down to who is selected as CEO of the new entity. But, certainly, H&CB’s dynamic CEO Jung Tae Kim has put his cards firmly on the table.
This strategy, for example, means H&CB will not make any fresh loans to big groups like Hyundai. However, H&CB’s decision is not an isolated one. In an extended interview with FinanceAsia magazine (see March issue), Korea First Bank’s equally dynamic CEO Wilfred Horie has outlined a broadly similar vision - to get out of big corporate lending and into retail banking.
Horie has also put his mouth where his money is. In January, he refused to participate in a government-sponsored bond issue to bailout corporate Korea - and as the interview reveals, suffered some extensive pressure in the process. Horie’s vision for the Korean banking sector is thus very similar to shareholder value-obsessed Jung Tae Kim’s of H&CB. Horie reckons Korea only needs six banks, all of which should be making returns on equity of around 20%.
And you don’t make 20% returns on equity by lending to chaebol. Clearly corporate Korea is going to have to get used to paying more to borrow money and that in turn will mean chaebols will have to think less about market share and more about absolute profit.
A more efficient banking sector will lead to the downsizing of all the top chaebol, and opens the door to large amounts of M&A, and to the spinning off of non-core subsidiaries. (The situation in Japan, experts predict, is identical.)
Meanwhile, the government wants this to happen, but also wants to avoid a meltdown in the process. It is therefore taking a few risks. One of the major ones is becoming the effective lender of last resort in the corporate bond market. The trouble with this, say bankers, is that the government is guaranteeing so much these days that its guarantee becomes increasingly more questionable.
Meanwhile, H&CB will focus on giving Mrs Kim a mortgage, and making a good return on equity for its shareholders. From a shareholder’s perspective, H&CB is managing the bank on behalf of it shareholders and not relegating them below the ‘national interest’.
