Korean banks play out waiting game

As we enter the third quarter, predictions of banking consolidation in Korea have resurfaced. They may be premature.

According to our sources, the government’s plan to merge Hanvit, Cho Hung and KEB may not end up going through until the end of 2001. That would follow a government announcement in November, a review period till February and completion at year end 2001.

This in turn may delay the date for marriages among the ‘private’ banks. Foremost among these banks are H&CB, Shinhan and Kookmin.

H&CB and Kookmin are the dominant retail banking players and are among the strongest banks in Korea by quite a stretch. Shinhan is a strong commercial bank.

Is there reason to be optimistic that a merger will happen? Maybe. That’s because investors continue to be jittery about the Korean banking sector. Only last week H&CB’s share price collapsed 10% in a single day. This occurred when construction company Woo Bang went bankrupt and it emerged that its exposure was second only to Seoul Bank.

The sheer magnitude of this single day fall reflects a concern among investors that if even a good bank like H&CB can unleash such skeletons, it does not bode well for the rest of the banking sector. It should not be forgotten that H&CB is the favoured bank of virtually every foreign bank analyst.

It is also the bank that has been the most vocal about its urge to merge. It appears to have ruled out a merger with Kookmin. Such a merger would mean laying off 40% of the combined group’s staff. While Korean banks were able to lay off 33% of their workers in the first phase of restructuring, that occurred during the financial crisis. Unions would not tolerate such a move today.

It is well known that Shinhan Bank - Korea's sixth largest bank - is H&CB’s favoured choice, but there again there are problems. H&CB is justly proud of its management record, and wants to be the senior party in any merger. This may make a merger with Shinhan more difficult, as Shinhan has a bigger market capitalization.

Shinhan also has a very strong culture - in part because of its history. Its major shareholders are wealthy Koreans living in Japan, and the shareholding is very tight. Shinhan’s management has made its intention to go it alone patently clear.

Time for a rethink

In any case, given that the three way merger between Hanvit, KEB and Cho Hung probably won’t happen till the end of 2001, this may result in a dilution of the competitive dynamic that was driving H&CB and Shinhan to think about their futures.

However, assuming H&CB still wants to merge soon and Shinhan continues to play coy, that leaves two options for H&CB in the short term. These are Hana and Koram Bank.

Hana has a very progressive culture and has been through a few mergers of its own since the crisis. It began life as a short term financing company but is now a corporate bank with a decent client list of high net worth individuals.

Koram is the smallest of the 11 nationwide banks, but was well thought of before the crisis thanks to its partial ownership by Bank of America. Another major shareholder, however, was Daewoo, and that led to problems when the Daewoo crisis broke.

It is about to gain some new investors in the shape of Carlyle and JP Morgan, which are likely to inject a combined W500 billion for a 30% stake, subject to approval.

Both Hana and Koram would bring the retail and SME-focused H&CB a new corporate client base.

If the worst is over for Korea Inc, the timing of such a merger might make sense.

But then again, H&CB may use the delayed formation of the Hanvit/KEB/Cho Hung colossus to play a waiting game for Shinhan.