Kakao encroaches on realm of traditional financial groups

By Anna J. Park

Will IT-based internet platform companies, like Kakao or Naver, ultimately encroach on the realm of traditional financial groups? Given the movements of the stock market alone, it seems it is already happening.

Korea's largest mobile messenger app operator and internet platform company Kakao's market capitalization has currently reached about 22 trillion won ($18.2 billion), up by 12 trillion won from a year ago. The firm's stock price has more than doubled during the past year, as its price logged 251,000 won on June 5, up about 110 percent from 120,000 won of June 7 last year.

While the internet-based company has successfully expanded itself into an innovative financial service provider, as it successfully launched Kakao Bank, Kakao Pay and Kakao Pay Securities over the past few years, the four major financial groups ― Shinhan Financial Group, KB Financial Group, Hana Financial Group and Woori Financial Group ― have witnessed their total market capitalization on the KOSPI market diminishing.

Over the one-year period, Shinhan's market capitalization has fallen to about 17 trillion won, down more than 4 trillion won from 21.3 trillion won a year ago. KB, Hana and Woori all posted a major loss of over two trillion won each in their market cap during the same period.

Interestingly, Kakao's increased market cap over the last year is a similar amount to the aggregate decrease in the four financial groups' market caps.

Market analysts explain that the rise of Kakao alone cannot explain the shift of the market cap changes, yet it could partly be seen as IT-based platform businesses' encroachment into territories of traditional financial firms. Some say, platform companies like Kakao and Naver could threaten traditional banks in the long-term.

“The business goal of Kakao is to enable and construct every possible form of financial services inside the Kakao ecosystem, as the firm aims to provide a comprehensive set of financial business, ranging from savings and loans, to insurances and asset management,” Kim Jae-woo, analyst at Samsung Securities, said.

Another analyst also pointed out Kakao is expected to log a solid growth this year, continuing its expansion.

“The key of the valuation of Kakao is its messenger business and Kakao Pay. Messenger-based profits have increased by 77 percent during the first quarter. It is expected to post an annual revenue of 1.1 trillion won in 2020, which would be a 65 percent year-on-year increase,” Daishin Securities' analyst Lee Mina said, adding that Kakao Pay is expected to log strong growth and profits from 2021.

Regarding banking shares, market watchers remain optimistic for this year, as despite the decrease in banks' net interest margin (NIM) and other concerns, increased demand for loans due to COVID-19 will buttress solid performances in banking shares. The government's unprecedented level of monetary support in policies is also preventing any major fall in financial firms' revenues.

However, some analysts pointed out that the financial groups' strengths shown in areas like diversification of business portfolios and synergy creation among affiliates, are expected to wane due to COVID-19.