Back-to-the Basics Is Key Strategy in Economic Turmoil

By Kim Jae-kyoung
Staff Reporter

The world witnessed the worst economic downturn last year since the Great Depression in 1929, and not a single country was insulated from the shocks of the global economic debacle.

Businesses and financial service firms across the globe went through the hell of 2008 in the wake of the global financial crisis. Most Korean banks were hit hard by the fallout from the crisis and are now struggling to fix their balance sheets.

However, for Citibank Korea and its chief, Ha Yung-ku, 2008 was not all that bad. Although Ha had a tough time riding out the financial storm, last year was an opportunity for him to differentiate the bank from major Korean lenders.

Even before the beginning of the global financial crisis, Ha pursued a differentiated business strategy, what he calls ``asset optimization,'' which has helped the lender withstand shocks from the outside amid the global recession, while other banks are being battered by such shocks.

In the eyes of the veteran banker, even tougher challenges are lying ahead this year, with the fallout from the financial crisis creeping into the economy in earnest. Ha stressed that he will try his best to weather current turmoil by holding onto asset optimization and the basic principles of finance.

``It is time to go back to the basics. We would place top priority on efficiency management, risk management and the like in 2009,'' said Ha in an exclusive interview with The Korea Times.

``Also, we will make the best efforts to solidify our relationship with customers and beef up investment in talent after slimming down the organization through voluntary retirement schemes,'' he added.

Asset Optimization Strategy

Citibank Korea's profitability and financial soundness are setting the lender apart from other major lenders here suffering from the double burden of a weakening capital base and decreasing profitability.

Despite the financial turmoil, the Korean unit of Citigroup posted net profit of 94 billion won in the third quarter, bringing the annual figure for the year to September to 351 billion won, down 5.9 percent from a year ago but considered outstanding when compared with other Korean lenders, which experienced a 16 to 40 percent fall in net income.

The net interest margin (NIM) at Citibank Korea came to 3.16 percent for the first nine months of the year, the highest level in the industry, which is in stark contrast to local banks' NIM, standing at around 2 percent. Its non-performing loan (NPL) ratio and loan loss provision ratio were also well above those of other lenders, at 0.83 percent and 190 percent, respectively.

Citibank Korea was able to maintain financial soundness even in the midst of the financial turmoil as Ha prioritized asset optimization in recent years, which is in stark contrast to most bank CEOs aggressively pursuing asset expansion.

Over the past year, deposits at Citibank Korea rose by some 1.9 trillion won, while loans did not increase much. Total assets in the banking industry jumped by more than 40 percent for the last five years but Citi's size increased little.

For asset optimization, the bank reevaluated and disposed of unprofitable assets and avoided entering risky industries. For example, the lender has exited from lending for project financing and to small builders since 2004, believing that they could turn sour during economic downturns.

``As a consequence, we are immune from risks associated with small- and medium-sized builders and project financing,'' he added.

In recent years, most local lenders rushed to increase their assets to become the biggest lender in the local banking industry, believing that size would give them a competitive edge. However, they are now being seized by the legacy of their reckless efforts at expansion.

$800 Mil. Capital Increase

Of late, Citibank Korea has further strengthened its financial strength by shoring up its capital base. Late last year, it raised $800 million by issuing new shares and selling subordinated bonds.

The bank raised $480 million, or 60 percent of the amount of the capital increase, via the issuance of common shares, with the rest to be funded by dollar-denominated subordinated bonds, both were purchased by its parent, Citigroup.

The capital increase pushed up its Tier-1 capital ratio to 11 percent from 9.74 percent under the current standard of Basel I. The lender's BIS capital ratio at Basel-1 also exceeded 13 percent from 10.8 percent.

``Our Tier-1 ratio was much higher than other banks' even before the recapitalization. Citigroup's investment this time will further strengthen our capital position, making us the strongest bank in terms of capital base,'' Ha said.

``With sound asset portfolios and a strong capital position, we will pursue better customer satisfaction, reinforcing our credit creation capacity,'' he added. ``This could also contribute to the stabilization of the foreign currency market as the capital will be injected in U.S. dollars.''

Ha explained that the Citi's core capital increase by way of issuing common stocks is a different approach from that of other banks, which increase their BIS ratios by issuing hybrid bonds, subordinated bonds or other types of debt rather than core capital.

``We decided to raise capital through the issuance of common stocks. In the BIS ratio, level is important but what it is composed of is much more important because only core capital can provide protection against unexpected losses during the economic slump,'' he said.

``Subordinate bonds are more like bonds and have little capability to cushion the blow,'' he added. Citibank Korea's Tier 1 capital amounts to 3.7 trillion won, while its Tier 2 capital is around 400 billion won.

The BIS categorizes capital into two types ― Tier 1 and 2. The former is composed of core capital, which consists primarily of equity capital and cash reserves. Included in the latter are subordinate debts and hybrid bonds, among others.

The BIS ratio is calculated by dividing all of capital by risk-weighted assets. Such capital includes both Tier 1 and 2. But the Tier 1 capital ratio compares assets with stocks and retained earnings.

Regarding speculation that Citigroup could sell the Korean unit amid the U.S. parent company's financial difficulties, Ha said, ``The possibility is zero. I believe that with the capital increase, we have been freed from the groundless speculation.''

Citigroup in Transition

Ha, who is a member of Citigroup's leadership committee, pointed out that market participants' concerns over Citigroup are quite overblown, given that the group remains sound in terms of capital strength and liquidity condition.

``Despite strong financial soundness, concerns have been growing in line with a plunge in stock prices. The fall was due mainly to short sales, and I think stock prices do not always move in proportion to financial soundness and profitability,'' he said. Citigroup's share price has tumbled more than 80 percent on Wall Street last year.

He explained that even before the U.S. government's support package, the group's Tier 1 capital ratio was 10.4 percent. With the support, the ratio is estimated to have increased to 14.8 percent. On Nov. 24, the U.S. government announced that it would take over a $20 billion stake in the firm and guarantee hundreds of billions of dollars in risky assets.

The veteran banker stressed that if the group rides out this crisis, it will take the lead in the transition of the global financial economy, emerging as a world's leading universal bank by capitalizing on its optimal business portfolio.

``In 1998, Citigroup was launched with the profit model of combining commercial banking, consumer banking and investment banking, which is actually a universal banking model,'' he said.

``I'm confident that Citi can overcome this difficult time as it has secured the ability to overcome crisis in its long business history,'' he added.

Korean Economy

Ha said that Korea will have a really tough time this year as it is a small, open economy susceptible to shocks from the outside.

He said that globally, the fallout from the financial crisis has crept into the economy in earnest, forecasting that the U.S. economy will turn around in the third quarter after contracting through the second quarter.

``Korea is more vulnerable to the impact from external shock than closed economy countries. In addition, there is a time lag before the external shock makes ways through the Korean economy,'' he said. ``Therefore, it will take some time for our economy to rebound.''

However, he remains optimistic about the future course of Asia's fourth largest economy.

``What is positive about the Korean economy is that it is quite 'dynamic.' So it is probable that the economy can turn around faster than other advanced economies,'' he said.

``If we turn this crisis into an opportunity, Korea could join the league of advanced countries,'' he added.

kjk@koreatimes.co.kr

Who is Ha Yung-ku? Ha Yung-ku is the CEO of Citibank Korea and Citigroup Korea. He joined KorAm Bank as CEO in May 2001 after 20 years at Citibank. Through tender offers in April 2004, KorAm became part of Citigroup and he returned to Citi. In November 2004, KorAm and Citi Seoul operations were integrated into Citibank Korea. Ha joined Citibank in 1981 and took the responsibilities of different country head positions, starting with treasurer in 1985, country business manager for Investment Baking Group in 1987 Corporate Banking Group head in 1994 and, most recently, country business manager for Global Consumer Bank. Under his leadership, Citibank Korea has become the most profitable and largest foreign bank in Korea. He was a member of the Financial Industry Development Committee and Deregulatory Committee from 1998 through 2007, both of which were led by the Ministry of Strategy and Finance. Ha completed his MBA at the Kellogg School of Northwestern University in 1981 and has BA in international economics from Seoul National University in Korea, conferred in 1976. He is married with three daughters and enjoys playing golf and snowboarding.