Big 4 trapped in status quo

Hana Financial Group’s takeover of the Korea Exchange Bank (KEB) has changed the landscape of the domestic financial industry, ushering it into an “era of the big four financial groups.” Business Focus asked industry experts about how the industry will unfold down the road and how they should react. We also conducted written interviews with the chairmen of the four groups — KB’s Euh Yoon-dae, Woori’s Lee Pal-seung, Shinhan’s Han Dong-woo and Hana’s Kim Seung-yu — to see their strategies for the coming year. — ED.

By Kim Jae-kyoung

Hana Financial Group’s takeover of KEB has reshaped the domestic financial industry. The move has reorganized it into a new look dominated by four big financial groups — KB, Woori, Shinhan and Hana Financial.

Now, they have become almost homogenized in all aspects, including total assets, net profits, number of branches, number of employees and deposits. It is widely expected that they will face uphill competition as they are pursuing differentiated strategies to get the upper hand in the newly-shaped market.

However, with the domestic retail market rapidly saturated, organic growth is not a valid strategy here. Therefore, they will seek growth opportunities in overseas markets. Also, they will look for M&A opportunities in the non-banking sector for balanced growth.

The look of the Korea’s financial industry will be determined on two things — 1) how fast will Hana overcome integration challenges and create synergy? And 2) who will move first beyond the status quo to take the lead?

These two questions are particularly relevant in two aspects. First, Hana’s integration does not look easy due to KEB’s militant union and cultural differences between the two entities. Second, the four groups are expected to take a “wait and see” attitude for a while because it is risky to seek first mover advantage at this moment.

Will Hana’s takeover become a trigger?

In December 2011, Hana’s total assets stood at 219 trillion won, well below the nation’s largest financial group Woori’s 372.4 trillion won. It is also much smaller than KB’s 362 trillion won and Shinhan’s 332.2 trillion won. But when combined with KEB, its total assets will balloon to 320 trillion won, a size commensurate with that of the other three.

Hana’s takeover is certainly seen as a good move, especially so from two dimensions — 1) using inorganic leverage to gain market share in an environment where organic growth is heavily saturated and 2) achieving a clear status upgrade in a market where asset size and branch footprint are still the most relevant driver of performance.

However, all those positive outcomes will only be possible when Hana ensures successful integration, according to industry experts.

“What is less clear is the probability of a successful integration. Hana may approach this with confidence after having acquired and integrated Boram and Seoul banks in the past. It is not obvious whether such experience will help or hurt the KEB integration. This one could be extraordinarily challenging,” a local bank executive told Business Focus.

“If Hana can overcome the integration challenge, I believe there is ample potential for synergy and competitiveness gains. Scale synergy is an obvious candidate. Client and product synergy is also a good candidate. A wise and conscious effort toward a constructive integration should be the number one priority.”

Given Hana and KEB have strengths in different segments, Hana will surely secure a balanced business portfolio after the takeover. Hana has expertise in retail and private banking, while KEB is a leader in trade financing and overseas networks. Hana will have a total of 36 overseas outlets in 22 countries as a result of the takeover.

Traditionally, KB is strong in retail banking, while Woori is competitive in corporate banking. Shinhan has shown strengths in both segments after it took over Chohung Bank and LG Card.

In terms of net profits, Hana is also expected to be on a par with other groups. For the first nine months of last year, Hana and KEB combined to post net profits of 2.52 trillion won, compared with Shinhan’s 2.59 trillion won, KB’s 2.15 trillion won and Woori’s 1.81 trillion won.

Who will move first?

The era of the big four financial groups has important implications. It means that they should reinvent business models and move beyond the domestic market. Globalization is now not a matter of choice but a matter of necessity due to growing competition, which will leave little room for growth here.

The Hana-KEB integration will accelerate this trend. It is highly probable that they will make aggressive forays into overseas markets while pursuing mergers and acquisitions (M&A).

The problem is that they all see the urgency for globalization and the overhaul of business models but no one seems willing to move first as uncertainty rules the market.

“The Korean financial groups seem to be under an evil spell, a spell which prevents them from thinking beyond the status quo.No one seems to be daring to think outside the box, to lead,” Boston Consulting Group managing director Steven Chai said.

“For example, now is the time to act on the desire to go outside of Korea yet no one is moving.I fear that the industry will sit still until it realizes that it is too late once again,” he added. “I doubt the Hana move will be enough to break the spell.Some fundamental mindset shift needs to happen in the top leadership of the industry, and that better happen soon.”

Currently, KB and Woori are looking to take over insurance firms to strengthen their relatively-small insurance businesses. KB is also looking for an M&A opportunity in the securities market.

The four groups are also moving to expand their presence abroad. Hana plans to enhance its overseas operations by taking advantage of KEB’s strong networks. KB and Shinhan are fixing their eyes on Indonesia and Malaysia, while Woori is seeking to increase its presence in India, Brazil and Vietnam.