What is unique about Chohung’s corporate culture?
As you may be aware, the bank has 104 years of history, and is the oldest commercial bank in Korea. Thanks to its long history, there is a sense of camaraderie, and in the last few years, the employees have understood they must move away from the old mentality and become more in tune with the modern way of doing banking. You may not see this as a positive, but Chohung is the only commercial bank where the current CEO, myself, has been with the bank for 37 years.
Given the length of Chohung’s history, what challenges does that create for doing mergers?
Chohung has gone through 11 different mergers in its history and is considered one of the most experienced at doing them. The latest example was its acquisition of two smaller provincial banks in 1999. The bank has become malleable to change.
Is another large bank merger between Chohung and another big Korean bank inevitable?
The bank is not considering any mergers with another major bank. The reason is this: five to six years ago, the amount of financial assets concentrated in the banks was 80% of total financial assets. This has fallen to 50% and in the US it is much lower still. So the trend is for financial assets to move out of banks into asset management – whether this is retail or corporate. So from my perspective, the synergy of merging with another major bank is very limited while the integration risk is very high. The bank will join with others in bancassurance, asset management or investment banking, but not with another commercial bank.
Does the Korean government have the power to persuade Chohung to join with another major bank?
You have to remember that the government’s ultimate objective in pushing for consolidation is to create sufficiently large domestic banks to compete with foreign financial institutions that are entering the market. It has already created a financial holding company including Hanvit Bank, and there is also a KDB financial holding company, and there is also a merger between Kookmin and H&CB, which by all accounts was strongly encouraged by the government. But given we already have three large groups, there is probably no real pressure for the remaining banks to merge.
Will Chohung have to raise new capital this year?
Currently Chohung Bank has no recapitalization plans. Our capital adequacy ratio at the end of last year was 9.78% and the bank expects to earn W600 billion ($475 million) in net profits this year. That will be sufficient to maintain our capital adequacy at 10% this year.
Chohung Bank is also negotiating with the government to reduce its ownership from 80% to 50%. However, our share price is below W5000 on a par value and it is difficult for the government to sell at this price. I believe our share price will appreciate above the par value in the second half of the year and this will precipitate the reduction of the government holding. I would like to see it sold to a strategic investor, or through the issuance of global depositary receipts.
Which is your preferred option?
The preference is for strategic investment. This is because the bank can benefit from more advanced management. There is also the benefit that we gain the perception from investors that when there is a strategic investment, there is a greater level of transparency. But if that does not work out we are quite happy to do a GDR.
Where would your share price need to be if you brought in a strategic investor?
It’s really a decision that is the government’s, as it owns the 30%. When the government recapitalized the bank they did so at the W5000 par value, so to recover the recapitalization cost, the government will be unwilling to sell below the entrance cost. The bank’s current estimate of the price at which the government will not incur losses is W5751. For the bank to reduce government ownership based on that price will require $700-800 million, which Chohung Bank believes is a sufficiently large size.
If something like this takes place, have your employees agreed they are comfortable with it?
Whenever there is a major change in policy, the bank calls workshops for the employees to discuss the mid- to long-term policies. So all the employees are currently aware of the bank’s plan, and understand it is necessary. I spent one month holding strategic forums for all of the bank’s 8900 employees who were divided into five groups and required to attend. So in a sense I held an internal investor relations meeting with the employees to explain the bank’s position.
If 30% of the bank was sold to a strategic investor, what would that represent on a price to book basis?
When I say W5751, that includes the entrance price plus the opportunity cost of the interest on the government bonds. The bank’s net asset value per share is about W3000 and so it’s slightly less than two times book value.
Have you had much experience working with a foreign partner?
The bank had an alliance with UBS Warburg in derivatives which lasted three years. That is now terminated, and it was the only experience the bank has had with a foreign partner.
Chohung Bank is focusing on which business lines?
The bank is currently focusing on areas of higher profitability, such as retail banking and in particular the credit card business, which currently accounts for more than 30% of the bank’s total revenue. In addition, the bank wants to grow and diversify into the areas of investment banking and asset management. The bank’s ultimate objective is to re-emerge as a financial services group and provide one-stop banking to its customers. It plans next year to set up a financial holding company that will include a commercial bank, an investment bank and an asset management company.
What asset management business do you currently do? Or will you be a new entrant?
The bank currently has a trust business within the commercial bank, and a subsidiary investment trust company which ranks one or two by asset size. The plan is to merge these two businesses under the holding company structure. Two European banks have expressed interest in becoming strategic investors in this asset management business and we are being advised on this.
If you were to create a partnership, what would be the goal?
Foreign financial institutions have come to Korea with the interest of developing either asset management, investment banking or bancassurance. We feel that Chohung Bank’s asset management business is not strong enough for us to compete effectively against foreign competitors – for various reasons, such as their more advanced skills. So the objective of bringing in a foreign strategic investor is not only about getting new capital but also gaining more advanced asset management skills.
What would be the limits of foreign control in this enterprise? What is your philosophy on this?
Obviously it’s open to negotiation. But our real interest is in sharing the management and splitting the ownership 50/50. We want to turn our asset management business into a competitive one. The focus is not for Chohung Bank to maintain a dominant control over it.
As observers of Korea, we get mixed signals about the reform process. Do you sense that the intensity of reform has gone down, or is it at an appropriate level?
There has been a substantial amount of restructuring in the financial sector. There are visible improvements. But in the context that the macroeconomic conditions are deteriorating globally and in Korea, that has aggravated the difficulties of financial sector restructuring. I am aware the government has been criticised for backtracking on reforms. But in my opinion, restructuring is very much happening. It is not as unplanned as outsiders view it. There is steady progress. The plan is being followed according to schedule. One of the differences between Korea and other countries is that we have fairly militant labour unions and we have the chaebol, and these two have posed obstacle in restructuring. The labour union problems have lessened, and there has also been significant progress in reforming the chaebol – though outsiders may not see it. The government is aware that changing a large business group overnight can cause a huge amount of traumatic ripple effects for the whole economy. The government wants to minimize the side effects, although that does not mean it does not want restructuring.
