Can merger revive Korea's regional banks?

JB Financial Group's headquarters in Jeonju, North Jeolla Province, left, and BNK Financial Group headquarters in Busan / Korea Times file

An activist fund's proposal to merge BNK Financial Group and JB Financial Group has reignited debate over whether consolidation is needed to secure the long-term sustainability of Korea's regional banks, industry officials said Wednesday.

The proposal comes as regional lenders face mounting pressure from demographic decline and weakening local economies.

Activist fund Align Partners said Tuesday it had sent an open letter to the boards of BNK Financial, the parent company of Busan Bank and Kyongnam Bank, and JB Financial, the holding company of Jeonbuk Bank and Kwangju Bank, urging them to review the strategic merits of a merger.

The fund owns about 14.8 percent of JB Financial and around 1 percent of BNK Financial.

"A regional bank's business model increasingly points to gradual decline as the population and economic base in Korea's southeastern and southwestern regions continue to shrink," Align CEO Lee Chang-hwan said during a press conference.

He argued that the two groups have limited overlap in their customer bases while their nonbanking businesses are complementary, creating opportunities to improve efficiency if they merge.

The fund asked both companies to respond by Aug. 7 on whether they would begin a formal review and disclose any implementation plan by the time they announce third-quarter earnings.

According to Align, a potential merger would create Korea's largest regional banking group with combined assets of about 234 trillion won ($157 billion).

Despite the potential benefits, industry watchers remain skeptical that the proposal will gain traction.

Any merger would require approval from the boards and shareholders of both financial groups, making it difficult for Align Partners to advance the plan on its own.

Sensitivities over the location of the headquarters could also be an obstacle.

The proposal will likely to lead a debate over the location of the combined holding company's headquarters — BNK is based in Busan while JB is headquartered in Jeonju, North Jeolla Province — as well as board representation and management appointments.

"The proposal had not been discussed with the company in advance and that no decision had been made regarding a merger or any other specific details," a JB Financial official said, adding that the shareholder's proposal would be handled in accordance with relevant laws and procedures.

BNK Financial said it would review the proposal with an open mind, while continuing to prioritize its role as a regional financial group and efforts to strengthen its competitiveness.