Korea is pushing ahead with the merger of government-owned Cho Hung Bank, Korea Exchange Bank and Hanvit Bank out of concern that there may be deposit runs at weaker banks from September.
ôThatÆs because from January 2001, bank deposits will no longer be fully guaranteed,ö explains Simon Maughan, head of Asia-Pacific Banking Research at Lehman Brothers.
Most deposits in Korea are kept in short-term tenures, such as three-month funds. Koreans are, therefore, likely to start transferring their money into stronger banks from September, as any deposits tied up after that date would not be fully guaranteed.
In the first four months of the year, Korean banks gained a total of W40 trillion ($35.9 billion) in new deposits. The merger candidates had mixed fortunes: Hanvit Bank gained an additional W604 billion in deposits, Cho Hung Bank gained W742 billion, while Korea Exchange Bank lost W174 billion. By contrast, KoreaÆs five healthiest banks - Kookmin, Housing & Commercial Bank, Hana, Koram and Shinhan - secured W14 trillion new deposits over the same period. Kookmin lured W5.6 trillion (14%) of these new funds.
Merging the strong with the weak
KoreaÆs regulators initially toyed with the idea of merging strong and weaker banks, but discarded these plans when investors drove KoreaÆs depressed market even lower. Now, Korean officials will begin the three-way merger next month. The government can afford to do so because it owns a 74.6 % stake in Hanvit, an 82% stake in Cho Hung and a 32% stake in Korea Exchange Bank.
Cho Hung, Hanvit and Korea Exchange will be combined under one financial holding company, local newspaper Chosun Ilbo reports, citing unidentified government officials. The government may offer the banks tax favours and buy their subordinated debts and bad debts. A stronger cashflow and a cleaner balance sheet would undoubtedly boost the merged banking entity. Only last month, Thomson Financial BankWatch downgraded the three banks' local currency short-term debt. The rating agency highlighted their weak profitability, poor capital adequacy and large non-performing assets overhead.
The governmentÆs plan is all about creating ôseveral national banking championsö, says John Hobson, head of regional banking research at Credit Suisse First Boston. Other analysts say that the government has finally become tired of being held hostage by chaebol, investment trust companies (ITCs) and banks during times of crisis.
The government injected W64 trillion into new funds and nationalized KoreaÆs banks following the 1997 financial crisis. With an estimated W30 trillion used to recapitalize the non-bank financial sector, including the ITCs, the cost of saving KoreaÆs financial sector is steadily rising. ThatÆs why many of the governmentÆs latest measures are aimed at reducing the moral hazard in the financial system, analysts say.
Lending without thought
Consider: A near-collapse of ITCs took place because lending decisions were made without due scrutiny. ITCs went into free-fall after buying piles of worthless paper from the now-collapsed Daewoo group. The ITCs, mainly controlled by KoreaÆs chaebol and some banks, failed to consider the risks when financing chaebol's capital-raising exercises last year. A curious oversight considering ITCs are the biggest buyers of KoreaÆs bonds and equities.
KoreaÆs regulators have now taken off the gloves and demanded that the ITCs degear their balance sheets. ItÆs also the reason why the government is removing its blanket protection for deposits.
ôItÆs tough to regulate a market where policy-directed lending plays such a big part," says CSFBÆs Hobson. "ItÆs the reason why Korea is so successful and yet has had so many financial problems. But, going forward, we believe the government resolve is strong and that the effects of reform will be better in Korea than in other markets."
