Financial firms' globalization must go on
Korea Investment & Securities CEO stresses target areas, better game plans
By Kim Da-ye
Nineteen Korean brokerages recorded a combined total of $100 million in losses in 14 nations over the fiscal year ending in March.
Even Samsung Securities, an affiliate of Samsung Group, cut its Hong Kong staff by half to cover its losses.
Do these dismal results mean Korean financial houses should give up their globalization effort?
A resounding “no” was the answer by Ryu Sang-ho, CEO and president of Korea Investment & Securities, during a recent interview.
He says the industry’s globalization must go on but with clearer targets and better game plans.
His target is emerging markets, while his game plan is full localization characterized by his “avatar strategy.”
“Can we know better about Apple than Goldman Sachs in the U.S.? Or can we understand Sinopec better than Chinese companies?” he asked with a strong hint that he wouldn’t take yes as an answer.
Ryuh compared Korean branches in emerging markets to “avatars,” saying that they will grow as their host countries grow at a speed faster for the next two or three decades than matured economies.
“These avatars can be linked into a network. They can be upgraded and become a strong regional player. That should be our financial industry’s globalization future,” the CEO said.
The key is assimilation, he says. At the beginning, his firm would send a few employees to transfer skills and knowledge _ for example, to set up an information technology system and train the local staff on finance. The rest have to be locally hired from the very beginning, Ryu said.
For example, the company is operating its main office for Southeast Asia in Vietnam called KIS Vietnam. “We should help the local employees to think the branch is a Vietnamese company. We should fulfill our corporate social responsibility there. The branch needs to be well integrated into the country so that it grows along with its economy,” the 52-year-old said.
Ryu is, at this early stage, eyeing Asian countries as Latin America and Africa are distant in terms of both distance and culture.
He said that many Asian economies have set Korea as their role model for development and are following the steps it took in the past. Not only can Korea Investment forecast their future path, but also it would be able to guide them, he said.
Among emerging countries, Ryu would pick those with a decent population size and those yet to be taken over by global investment banks. “In the absence of tigers, foxes become the ruler,” he beamed.
The financial watchdog reported that Korean brokerage houses lost the most in the fiscal year 2011 in global financial hubs, particularly Hong Kong.
It said Korean companies hired a large number of local analysts and focused on attracting institutional investors. But the expansion of other Asian investment banks including Japan’s Daiwa Securities, China’s International Capital Corporation and India’s Reliance Securities and intense competition in brokerage services led to losses by Korean contenders.
3 stages of globalization
The lifetime financial pundit divides globalization into three stages. The first involves selling domestic products to foreign investors. In the early 1990s when Korea opened its capital market, securities companies opened offices in New York and London to sell Korean stocks to overseas institutional investors, securing foreign investment that the developing country much needed.
In the second stage, brokerages buy foreign products, especially those with higher risks and higher returns from emerging markets and sell them to domestic investors. Such products including Brazilian bonds and Chinese and Indian equities were popular in the past few years.
Ryu sees the third stage as true globalization in which Korean businesses sell overseas products to foreigners abroad. He said that Korea Investment has entered this chapter.
In Vietnam, the company acquired a 49 percent stake in Gia Quyen Securities Joint Stock (EPS) last year for some 7 billion won. Once the local government loosens regulations against foreign ownership, Korea Investment plans to boost its stake to 65 percent.
The firm is also mulling whether to enter Indonesia. It has worked on establishing a local network with various brokerages, a credit rating agency and a financial watchdog while developing financial products related to the country such as the Korea Investment Inni-Malay Fund launched in 2008.
Ryu suggests a timeline of becoming one of Asia’s leading investment bank by 2020 when he hopes the company will manage 200 trillion won of assets, make 2 trillion won in profit before tax and generate 30 percent of its income from overseas business.
He said that leading represents symbolic value rather than size ― it would be unfair to be compared to gigantic, yet unsophisticated Chinese firms.
Ryu names Singpore’s DBS Bank, which he compares to Hana Bank before its acquisition of Korea Exchange Bank, as a good counterpart which he wishes Korea Investment to emulate and later outperform.
“Located in a financial hub of Southeast Asia, DBS Bank has key branches across the region and benefits from a network of overseas Chinese. If we could surpass DBS both in size and capacity, we would be able to say we are one of the leading investment banks in Asia,” Ryu said.
Trust is key
Ryu’s practical and realistic view on globalization comes from the seven years he spent in London between 1992 and 1999 as a sales representative of Daewoo Securities.
When Korea opened its capital market in the early `90s, Ryu, who worked under the English name James, was at the front line for drawing investment into Korea. Starting from scratch, he focused on building trust.
The CEO points to sincerity as the foremost element of trust. When he arrived in London, the Kuwait Investment Office (KIO), the city’s branch of the Middle Eastern state’s sovereign Kuwait Investment Authority wealth fund, was one of the most influential institutional investors.
KIO fund managers would be surrounded by brokers from all over the world including many Koreans including Ryu. Korean brokers, however, gave up after a couple of years without striking any deals.
In the absence of a double tax avoidance agreement between Korea and Kuwait, the KIO had to pay taxes on capital gains on trading Korean equities and as a sovereign wealth fund, it was not willing to do so.
Ryu stayed in touch with the KIO and even appealed to the finance ministry to waive capital gains taxes against the fund without success.
In the wake of the Asian Financial Crisis in 1998, however, the Korean government ― desperate for foreign investment ― removed duties for the KIO. By that time, Ryu was the only Korean broker that stood by the fund.
“Then we became overloaded with orders,” he said.
“For nearly six years, we did not make a single business deal. I didn’t care if it took five years or 10 years. I thought they would eventually become our client.”
He said that in the eyes of fund managers, brokers are often seen as just running after fees. It is important to show sincerity that they are working in the clients’ best interest, which takes time and effort.
Another element of trust Ryu identifies in being responsible for what one says. “My word is my bond” is his favorite phrase.
He said that the lack of the responsibility is dragging down Korea’s financial industry. In the U.K., orders made on the phone have the same power as written contracts have and must be kept.
Islamic finance
During his tenure in London, he became one of the first Koreans to deal with investment from the Middle East, often referred to as oil money.
Working with sovereign wealth funds from the region, he came to understand the nature of the money and was convinced he could secure some of it.
Ryu said that there are currently only two economic powers that have cash reserves ― China and oil-producing Middle Eastern countries.
While China has heavy future expenditure for building infrastructure and buying resources abroad, the oil-rich nations have passed that stage. They have laid roads and built desalination facilities.
“They are managing their cash reserves for the next generation. It means that it is a long-term, stable fund ― quality money.”
The CEO said that the Muslim-majority countries do invest in conventional assets that do not comply with Islamic laws. But the modern warfare between the West and the Islam has caused those countries to try and increase the portion of Sharia-compliant investment.
That explains why global financial hubs including the U.K., Hong Kong and Singapore are moving to accommodate Islamic financing. The Hong Kong government began consultation on proposed amendments to tax laws in March to foster an Islamic bond market.
Because Sharia law does not allow making money out of money, Islamic bonds called sukuks pay out a type of dividend gained from managing real assets. For sukuks to be profitable, taxes for selling and buying underlying assets must be waived.
Korea had been preparing well in advance to secure investment from Muslim-majority countries, and Korea Investment was at the forefront.
The firm hired the chairman of the Sharia Advisory Council at Malaysia’s central bank as an advisor and created an Islamic finance team.
But the amendment to the tax laws proposed by the finance ministry, however, failed to pass the National Assembly in late 2010 because of fierce opposition from Christian groups.
Ryu said Korea Investment hasn’t given up on Islamic finance. As soon as the proposed amendment takes effect, the company will issue Korea’s first sukuks for Malaysian and Middle Eastern institutional investors to buy.
He expects that a new administration interested in the globalization of the financial industry is likely to support the idea but the National Assembly may again challenge it.
“We hope society comes to agreement on sukuk from an objective and secular stance,” Ryu said.
“It is, at the end of the day, a kind of financial technique.”