By Choi Kyong-ae
Korean banks are pursuing mergers and acquisitions (M&As) in emerging countries because they see little room for growth in the domestic market.
Home-grown and multinational banks have struggled with declining margins due to tougher competition and record-low interest rates in Korea in recent years, industry people said Wednesday.
"Acquiring a local bank in a foreign country will be a shortcut to enter the market. As the local bank already has its customer base, employees and outlets, the buyer can just jump into operations after the acquisition," said a Shinhan Financial Group official. "It takes at least two to three years for a Korean bank to reach the breakeven point when it sets up an overseas branch."
In December 2012, Shinhan Bank acquired a 40 percent stake in Bank Metro Express in Indonesia, a move to secure a new growth engine away from the almost saturated domestic market. But the bank didn't provide an acquisition price due to a confidentiality contract with the seller. Shinhan Bank is the flagship unit of Shinhan Financial, the country's most profitable bank last year.
The Indonesian financial authorities approved the acquisition on Thursday, more than two years after the share purchase deal, the official said asking not to be named.
While expanding into the non-banking sector, Shinhan Bank said Wednesday it "will continue to seek M&A opportunities in emerging countries this year."
Other banks have already jumped on the same bandwagon: they took over the management control of a local bank or invested in a stake in local banks.
KB Kookmin Bank bought a 42 percent stake in JSC Bank CenterCredit (BCC) in Kazakhstan for 954 billion won ($893 million) in 2010 to become the second-biggest shareholder. Woori Bank acquired a stake in Indonesia's Saudara Bank in 2013 and at the end of 2014, the local financial authorities approved the merger between Bank Woori Indonesia and Saudara Bank. Bank Woori Indonesia is a local affiliate of Woori Bank. Hana Bank invested in a stake in China's Jilin Bank in the same year.
Analysts say domestic banks are moving in the right direction if they acquire a local bank to expand into global markets. But they warned an acquisition could carry some risks as market conditions may change and the due diligence on a local bank may not be conducted thoroughly.
"Korean banks need to advance to global markets with a long-term road map which does not change according to their management changes. Even if the management is replaced at a Korean bank, the road map should remain intact," KDB Daewoo Securities analyst Kim Joong-han said Wednesday.
Citing KB Kookmin's acquisition of BCC, he said thorough due diligence is badly needed to avoid hefty investment losses. KB Kookmin found the book price of BCC plunged to 29.3 billion won at the end of last year, according to the bank.
For acquisition, the analyst asked banks to make a sufficient market survey and due diligence to avoid M&A risks.
At the end of 2014, Korean banks had a total of 162 overseas branches in 36 countries, up 10 branches from a year earlier, according to the Financial Supervisory Service.
As their combined interest income fell to 34.87 trillion won in 2013 from 39.92 trillion won in 2011, Korean banks that largely focus on the domestic market aim to increase their overseas earnings ratio.
Korean banks are pursuing mergers and acquisitions (M&As) in emerging countries because they see little room for growth in the domestic market.
Home-grown and multinational banks have struggled with declining margins due to tougher competition and record-low interest rates in Korea in recent years, industry people said Wednesday.
"Acquiring a local bank in a foreign country will be a shortcut to enter the market. As the local bank already has its customer base, employees and outlets, the buyer can just jump into operations after the acquisition," said a Shinhan Financial Group official. "It takes at least two to three years for a Korean bank to reach the breakeven point when it sets up an overseas branch."
In December 2012, Shinhan Bank acquired a 40 percent stake in Bank Metro Express in Indonesia, a move to secure a new growth engine away from the almost saturated domestic market. But the bank didn't provide an acquisition price due to a confidentiality contract with the seller. Shinhan Bank is the flagship unit of Shinhan Financial, the country's most profitable bank last year.
The Indonesian financial authorities approved the acquisition on Thursday, more than two years after the share purchase deal, the official said asking not to be named.
While expanding into the non-banking sector, Shinhan Bank said Wednesday it "will continue to seek M&A opportunities in emerging countries this year."
Other banks have already jumped on the same bandwagon: they took over the management control of a local bank or invested in a stake in local banks.
KB Kookmin Bank bought a 42 percent stake in JSC Bank CenterCredit (BCC) in Kazakhstan for 954 billion won ($893 million) in 2010 to become the second-biggest shareholder. Woori Bank acquired a stake in Indonesia's Saudara Bank in 2013 and at the end of 2014, the local financial authorities approved the merger between Bank Woori Indonesia and Saudara Bank. Bank Woori Indonesia is a local affiliate of Woori Bank. Hana Bank invested in a stake in China's Jilin Bank in the same year.
Analysts say domestic banks are moving in the right direction if they acquire a local bank to expand into global markets. But they warned an acquisition could carry some risks as market conditions may change and the due diligence on a local bank may not be conducted thoroughly.
"Korean banks need to advance to global markets with a long-term road map which does not change according to their management changes. Even if the management is replaced at a Korean bank, the road map should remain intact," KDB Daewoo Securities analyst Kim Joong-han said Wednesday.
Citing KB Kookmin's acquisition of BCC, he said thorough due diligence is badly needed to avoid hefty investment losses. KB Kookmin found the book price of BCC plunged to 29.3 billion won at the end of last year, according to the bank.
For acquisition, the analyst asked banks to make a sufficient market survey and due diligence to avoid M&A risks.
At the end of 2014, Korean banks had a total of 162 overseas branches in 36 countries, up 10 branches from a year earlier, according to the Financial Supervisory Service.
As their combined interest income fell to 34.87 trillion won in 2013 from 39.92 trillion won in 2011, Korean banks that largely focus on the domestic market aim to increase their overseas earnings ratio.
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