By Lee Hyo-sik
Staff Reporter

Unlike their U.S. and European counterparts, domestic financial institutions have emerged largely unscathed from the worldwide credit crunch and the subsequent financial market mess. What's more, local banks and other financial services companies took advantage of the collapse of the global financial system to become leading players in Asia and beyond in the post-crisis era by strengthening risk management and improving their bottom lines.

Analysts here say that the U.S. and Europe were at the center of the trouble and this made Korean firms better able to withstand the fallout of the global market turmoil, unlike during the 1997-98 Asian financial crisis.

They made an all-out effort to cut bad loans and beef up their capital base through the strengthening of risk management and downsizing, and coped well with their high level of foreign short-term debts.

Additionally, the government's preemptive measures, including its $100 billion loan guarantee, helped domestic lenders roll over maturing external debts and secure dollars amid the global credit crunch late last year and early this year.

Following the burst of the U.S. subprime loan defaults in the summer of last year, global credits dried up suddenly, devastating Lehman Brothers and other investment banks that heavily invested in collateralized debt obligation (CDO) and other financially-engineered products through excessive leverage. Soon after, Lehman collapsed, sending a shock wave through the worldwide financial market.

American Insurance Group (AIG), Bank of America (BOA) and Citigroup rushed to ask the U.S. government for financial help. To prevent the total meltdown of the financial system, the U.S. injected trillions of dollars of taxpayers' money into the struggling financial giants.

On the domestic front, Kookmin, Shinhan and other lenders also suffered from what happened in the U.S. as foreign banks became reluctant to lend dollars and extend the maturity of existing loans.

But their improved crisis management, the government's loan guarantees and the signing of a currency swap deal with the U.S. helped them ride out the worldwide credit squeeze. Korean banks have emerged rapidly from the slump, while their U.S. and European counterparts are still facing a range of difficulties.

Local lenders began generating profits in the second quarter of the year but western financial firms continue to post huge losses. During the April to June period, Shinhan Financial Group posted 440 billion won in net profits, with Hana Financial Group earning 251 billion won. Their third-quarter net profits are estimated to be even larger thanks to a rise in net interest margin, a decline in loan-loss reserves and other favorable business conditions.

Daishin Securities forecast that nine local financial groups and banks would post a combined net profit of 1.65 trillion won between July and September, up 16.5 percent from a quarter ago. Among them, Shinhan is expected to record the largest net income with 417 billion won in the third quarter, followed by Woori Financial with 280 billion won, Hana Financial with 245 billion won, IBK with 227 billion won, KEB with 178 billion won and KB Financial with 153 billion won.

``Corporations and financial firms learned valuable lesson from the currency crisis a decade ago. They made a far-reaching systemic transformation, which gave them new structural strength, while corporate governance and management have significantly improved. These were behind the nation's successful overcoming of the current financial difficulty,'' LG Economic Research Institute economist Shin Min-young said.

He also said Korea's $30 billion currency swap arrangement with the U.S. and the government's loan guarantee of up to $100 billion for banks greatly helped to ease a dollar shortage here and stabilize the domestic financial market.

``Ironically, if the local financial industry had been more sophisticated and advanced than it actually was, banks and other financial firms would have been hit much harder by the market meltdown. If that was the case, they would have had larger investments in derivatives and other financially-engineered products,'' Shin said.

The economist then said local banks still have a long way to go before emerging as truly a competitive global player and market leader on the global stage.

``They should cut a portion of short-term foreign loans that mature within a year from their total overseas borrowing. If the global credit dries up again, the high level of short-term borrowing will become the main headache for lenders, which will likely destabilize the entire financial sector. The government should play a role in this by enhancing supervision and encouraging banks to resort to long-term maturity loans and adopt a more conservative risk management,'' Shin said.

According to the Bank of Korea (BOK), the nation's foreign liabilities increased by $11 billion to $380.12 billion as of the end of June from three months earlier, with short-term debts accounting for 38.7 percent.

He also suggested banks should turn their eyes abroad to find new sourcs of earnings as the domestic market is about to reach a saturation point. ``They should also balance their business portfolios between banking, insurance, credit cards and securities to emerge as leading financial groups in Asia. Besides Shinhan Financial, other leading groups have a lot of work to do.''

Shin urged the government to increase its currency reserves to as high as $300 billion to more effectively deal with future financial market turmoil and ensure the soundness of the banking and other financial sectors. According to the central bank, currency reserves reached $254.25 billion at the end of September, up $8.79 billion from a month ago, and the highest level since June last year.

leehs@koreatimes.co.kr