KDB Goes Global as Investment Bank
The following is the first in a series of articles concerning the global financial market and the Korea Development Bank's plan to become a leading investment bank in Northeast Asia. ― ED.
By Na Jeong-ju
Staff Reporter
The Korea Development Bank (KDB) is now at a critical turning point.
As a state policy bank, it is now making all-out efforts to develop itself into a global investment bank under the government's plan to turn the country into a regional financial powerhouse.
Despite its status as the world's 13th largest economy, Korea's financial sector is largely underdeveloped, with most banks still seeing interest income as the largest source of their earnings.
``With the globalization of the financial sector accelerating, more Korean companies are expanding their businesses overseas, highlighting the importance of cross-border investments,'' KDB Governor Kim Chang-lok said.
``Increasingly diverse and sophisticated corporate demands nowadays call for financial services not only for loan provision, but also for corporate bond issuance, mergers and acquisitions, project financing, consulting, and financial engineering.''
Investment banking is now emerging as a key element for Korean banks struggling to find their next growth engine amid a negative outlook for earnings. The outlook for the business is positive considering their plans to explore more overseas markets, while their loan business in the local market is reeling because of the government's strict regulations.
Banks have begun to reinforce investment banking bureaus and hired more staff to deal with securities and real estate investments, project financing and derivatives trading, a sector that has been dominated by foreigners.
At the center of the evolution is KDB, which has set the goal of becoming a global investment bank with strong support from the government.
Financial regulators said they are determined to make it a leading investment bank in Northeast Asia.
``We will accelerate efforts to develop KDB into a competitive investment bank in Northeast Asia while turning it into a financial holding company and privatizing it,'' Financial Services Commission Vice Chairman Rhee Chang-yong said at a forum on April 17. ``Korea's securities industry lacks competitiveness compared with global investment banks. Total assets of the top five domestic brokerage houses, including Samsung and Daewoo, are only 1.3 percent that of foreign companies.''
He said for further economic growth, the country cannot overly rely on the manufacturing sector, but must develop the financial sector, particularly investment banking, as its next growth engine.
``In recent years, we've hired more investment banking professionals on expectations that the sector will grow rapidly here in the years to come,'' a KDB official said. ``Banks are extending into the market as part of efforts to diversify income sources. The competition will become fiercer.''
Since its foundation in 1954, KDB has continuously redefined its role and function in line with the changing needs of the times.
The bank focused on supporting light industries and economic infrastructure buildup in the aftermath of the Korean War, export-oriented industries in the 1960s and 1970s, and the automobile and electronics sectors in the 1980s.
In the 1990s, the bank contributed much to the advancement of Korea's industrial structure by extending loans to value-added, hi-tech industries, most notably semiconductors.
In the aftermath of the 1997-98 financial crisis, KDB successfully served as a market stabilizer by undertaking restructuring projects for distressed companies and supplying more industrial capital to address the credit crunch, while correcting market failures by giving ventures and small companies access to financial resources and engaging in projects for balanced regional development.
KDB is now facing new challenges.
Recent financial trends are driving the KDB to transform into an internationally competitive investment bank, according to KDB officials.
Becoming a global IB conforms to KDB's goal of becoming the nation's financial market leader as well as to the government policy of turning the nation into the financial hub of Asia, which demonstrates the public roles played by the bank.
``Backed by its strong domestic customer base, the bank will turn into global, providing comprehensive services to customers worldwide. To this end, KDB has set up short and mid-term plans in three main areas and will carry them out step by step,'' a KDB official said.
First, KDB will expand new businesses in the overseas market to avoid unnecessary competition in the domestic financial market and to increase the national wealth by diverting the abundant foreign liquidity inflows to overseas investment.
For example, KDB will utilize its Hong Kong subsidiary, KDB Asia Ltd., to launch offshore private equity funds and run international asset management businesses.
Also, through agreements with development financing agencies in emerging markets, the bank will discover new overseas energy and resources development projects to support.
Moreover, by employing its network with the Northeast Asia Development Financing Council (NADFC), the three northeastern provinces of China and the Trade and Development Bank of Mongolia, KDB will open up new project-financing markets overseas.
Secondly, the bank will raise its investment banking business to the global level. In doing so, a particular emphasis will be made on expanding its role as the lead manager of overseas bond issuance.
Furthermore, in an effort to diversify its client base, the bank will increase its share of loans to non-Korean residents overseas, while expanding its financial products for these residents to the areas of foreign exchange and derivatives.
Thirdly, KDB will upgrade its operational infrastructure and organizational structure through various measures, including fostering key regional branches that optimize unique traits of each region.
For instance, the bank will nurture KDB Asia Ltd. and the London branch as centers specializing in primary market business and derivatives trading, respectively.
In addition, KDB will establish a global dealing system that links the trading center of its headquarters with the overseas network and runs around the clock for foreign exchange and bond trading.
At the same time, KDB will increase recruitment of outside professionals to further enhance the bank's professionalism. To better attract and retain competent trading experts, KDB will broaden the range of its incentive payment, it said.
All of these efforts will contribute to boosting the competitiveness of the bank's trading business.
``Our goal is to make KDB a strong investment bank in Asia,'' Governor Kim said. ``We will consider participating in merger deals in the region.''
KDB officials said the bank is modeled on UBS, Switzerland's largest financial services firm, and Temasek Holdings, Singapore's state-owned investment firm, to grow into a global investment bank.