Kookmin aims for organic growth, not M&A

CEO Min seeks to minimize CEO risk to ensure business sustainability

By Kim Jae-kyoung

Growth prospects for Korea's banking industry have been less than optimistic due to rising household debt, economic uncertainties, narrowing interest margins and various other factors. This kind of shadowy situation is the most difficult time for CEOs to make strategic decisions on whether to pursue organic growth or quickly expand via merger and acquisitions (M&As).

However, for Min Byong-deok, CEO of Kookmin Bank, it is not a difficult one. It is not because the nation’s largest lender by assets is in better shape than its rivals here, but because the chief executive is sure of where the bank stands.

In the past, Kookmin experienced turbulent times as its loans extended to risky sectors turned sour en masse in the wake of the global financial crisis. Min believes that the lender was hit particularly hard by external shocks due to weakness in internal capabilities caused by poor risk management and mishandling of the workforce.

In the eyes of Min, it is still too early for Kookmin to opt for an M&A to grow bigger. According to him, strengthening internal capabilities should come before growth to ensure business sustainability. Kookmin Bank is the flagship of KB Financial Group, the nation’s leading financial group.

“It is not desirable to expand the size of a bank in a hazardous fashion. Growth should come in line with improvement in internal capabilities. I think that the expansion pace of the size of a bank should not surpass the nominal growth rate of the nation’s gross domestic product,” Min said in a recent interview with Business Focus held at his office in Yeouido, Seoul.

Min denied any possibility of an M&A with another major bank in the near future but hinted that KB is interested in taking over non-banking financial firms, such as Woori Investment & Securities.

“The portion of Kookmin Bank to KB Financial is too high. We have to strengthen our non-banking sector by taking over either an insurer or a securities firm,” he said. Kookmin currently accounts for more than 90 percent of the group's total revenue.

As a life-time banker with expertise in marketing and sales, CEO Min has three key strategies in his agenda to move the bank on the right track ― strengthening internal capabilities, going global and seeking convergence with the mobile industry.

Since he took the helm of Kookmin last July, Min has placed top priority on enhancing internal capabilities by making continuous efforts to reduce costs and streamlining the organization through restructuring.

In March, the bank's total assets reached 268 trillion won ($251 billion) with total customers numbering 26.5 million. The sheer number of branches spread out nationwide, totaling 1,141. It posted a net profit of 740.6 billion won in the first quarter, a turnaround from the previous year’s sharp losses.

The CEO hinted that the lender’s annual net income may surpass the 2 trillion won mark this year. “We did a fine job for the first three months. I expect that we will continue a similar performance for the rest of the year,” Min said.

Overhaul of risk management system

The veteran banker pointed out that the improvement was the result of the bank’s efforts to beef up the internal capabilities by particularly overhauling its risk management system.

“Following the crisis, we had to set aside a huge amount of reserves for loan losses associated with mortgages and project financing (PF), which dealt a fatal blow to us. To solve this problem, we have completely overhauled our risk management system by strengthening the credit screening structure and training our employees in a more professional way. Simply put, our strategy is to reduce risks and maximize profits,” he said.

The 58-year-old CEO clearly sees the importance of minimizing the so-called CEO risk to ensure business sustainability.

“The direction of a bank is affected highly by the CEO risk. My strategy is to minimize such risks by securing transparency in management. To that end, we have introduced a system to check outside directors, while decentralizing the organization by giving more authority to branch managers,” he said.

In another attempt to beef up its competitive edge, the lender has diversified its product portfolio and marketing channels to meet customers’ needs. “Currently, the most urgent issue for a bank is how fast it can read customers’ trends, with their needs becoming more and more diverse,” he said.

Regarding additional layoff plans, Min said that the lender has no plan to carry out additional restructuring this year but hints that he will continue to streamline the organization in the years to come. The bank cut its payroll by 3,200 over the past year through voluntary retirement programs.

“Through restructuring, our productivity and efficiency have been improving. This year’s focus will be placed not on reducing workforce further but on putting the right man in the right place,” he said. “We plan to decide the scope of the next restructuring, considering the number of executives and employees that will retire.”

Globalization

Kazakhstan’s Bank CenerCredit (BCC) has been a headache for Kookmin as its investment in BCC incurred huge losses in the wake of the financial crisis. Kookmin booked around 600 billion won in write-offs related to its purchase of the BCC stake worth around 1 trillion won.

The investment was a litmus test for local banks’ globalization drive as it was considered a major step above past forays made by Korean banks into the international market. Although it ended in a failure at this moment, Min said that it was a costly but good lesson for the lender to become a leading global player in the future.

KB Financial, the parent group of Kookmin, has recently decided to reinvigorate the Kazakhstan lender through additional investment as the Kazakhstan economy is showing signs of recovery thanks to rising oil prices.

“We have to go with it (BCC). BCC is lagging behind in asset management and risk controls. We have changed the BCC’s management by hiring more experienced professionals as executives,” said Min.

“It was a costly lesson but I think it was also a good experience. In the long-term, the investment in BCC could be a strong foothold for us to make inroads into other countries in the region.”

With the lesson in mind, Min is seeking to expand the lender’s presence in overseas markets. His strategy is “localization.” According to him, domestic banks should focus on localization as Korean banks' overseas branches are not fully localized in terms of workforce and asset portfolio.

Min recognizes that Kookmin’s long-term growth potential lies in offshore markets, and thus plans to take a number of actions in the coming years.

“Previously, the main function of foreign branches was to perform supplementary roles to Korean corporations operating in overseas markets. We should expand their business scope to local companies from ethnic Korean firms,” he said.

“Our basic strategy is localization. We can either take over underperforming local banks or set up a subsidiary there. We are seeing opportunities in emerging markets in Asia.”

Kookmin opened a branch in Ho Chi Minh in Vietnam in late June. It also plans to open representative offices in Hanoi, Mumbai and Osaka. It launched a taskforce to start a subsidiary in China or take over a local lender by 2013.

Finance-mobile convergence

In the rapidly-changing business world, a bank is not able to survive in a sustainable way if it draws a line between industries. What is happening in the business circle is convergence between different sectors.

Among them, the most outstanding one is finance-mobile convergence. Few industries are as closely intertwined as these two, and Min recognizes the significance of the change.

“We are open to all possibilities in forming a strategic alliance with telecommunication companies. I believe that we should move toward finance-mobile convergence. In the medium- and long-term, it is essential to fortify cooperation,” Min said. “If they combine customer database, it could be beneficial for both.”

Both banks and mobile carriers have huge customer databases, which are big assets for them. The synergy could be maximized when they share such information. But Min said that Kookmin is not currently in discussion with local mobile carriers.