IB Sector Should Learn Lesson From Wall Street
By Lee Hyo-sik
South Korea can become a home to one of the world's most flourishing investment banking (IB) industries if domestic investment banks learn lessons from the demise of their peers on Wall Street and focus on traditional commission-based businesses, rather than on riskier principal investments, a leading IB expert here said.
In an interview with The Korea Times, Hana Investment Bank CEO Lee Chan-keun flatly dismissed speculation that the era of investment banking has come to an end following the collapse of Lehman Brothers and other U.S. investment banks, stressing now is the time for Korean players to strengthen their competitiveness and expand business at home and abroad.
``Wall Street-based investment banks were excessively engaged in trading and principal investment to maximize returns. To do so, they over-leveraged and took too greater risks, which brought down the entire sector when global credit dried up,'' Lee said.
He argued U.S. banks developed and invested in a range of derivatives and other high-risk high-return products, while disregarding merger and acquisitions (M&As), and other fee-based corporate financial and consulting service businesses.
``Investment banks should place top priority on their original business domains to generate a stable stream of earnings by taking a reasonable level of risk, as well as to provide businesses with essential corporate financing and consulting services. Keeping this in mind, Korean investment banks should make an effort to enhance their capability to fill the void left by their U.S. counterparts,'' the CEO stressed.
Touching on the unfolding international financial turmoil triggered by U.S. subprime mortgage defaults, the CEO said its fallout has begun spreading to the real economy across the globe, saying the United States and other major economies are facing increasing downside risks.
``The global economy will grow at a much slower pace next year as financial institutions continue to tighten credit. A liquidity shortage will further dampen private consumption and corporate spending, and bring down the value of real estate and other assets around the world,'' he noted.
``The U.S. government's $750 billion injection into the banking sector and a series of rescue plans unveiled by European and other countries over the past few weeks are like a temporary cure for the patient. The ongoing financial market turmoil will likely continue for the foreseeable future. We have to be prepared for the worst-case scenario,'' the CEO stressed.
He said Hana Investment Bank anticipated the current market turmoil last year and has been running a contingency plan to secure greater liquidity. ``In times of crisis, there are opportunities for growth as industry competition has eased as a result of sluggish market conditions. We are now actively pursing more deals and as a matter of fact, we are participating in all ongoing M&A deals in Korea,'' Lee said.
Since he became company president last September after a 25-year career in the IB field with a number of international financial firms, including JPMorgan and Goldman Sachs, Lee has been placing top priority on employee training. The CEO said the training program has come to an end, adding now is time for his company to leap forward and emerge as Korea's top investment bank.
``We also changed the incentive system from a team-oriented one to a larger business unit-based one in an effort to create synergy among business divisions, and encourage workers to go after long-term and lucrative deals,'' he elaborated.
The company has recruited several Korean nationals previously working on Wall Street as investment bankers over the past few months to boost its manpower. ``Additionally, we will have the first foreigner heading our fixed-income division later this month. We will continue to hire talented industry professionals in the future,'' Lee said.
He argued that Hana Investment Bank has an edge over brokerage-based investment banks here as it is part of Hana Financial Group. ``When the market is good, there is not much difference. But when the market is bad as it is now, we have a greater advantage in securing liquidity through our banking and other affiliates. We also have more diverse channels to market our products,'' he said.
But it is also important for all IB players here to flourish, with companies competing with one another in a constructive manner, he said, adding Korea's IB industry can then advance and become a top global player.
The CEO also said his company is planning to set up its first overseas branch in Hong Kong to cover the Asia Pacific region, gather the latest information and recruit more talented manpower.
``We will expand our presence in other Asian countries to become a premier regional investment bank with global practices. It is hard for us to compete with leading Western IB firms in their markets. But in Asia, We do have an edge over global financial firms because we know the markets well,'' Lee stressed.