Daewoo seeks financial innovation

_ CEO Im focuses on beefing up retail business, investment banking role _

By Kim Da-ye

Every historic explorer needed funding when embarking on a journey to conquer a new part of the world. For Daewoo Securities CEO Im Kee-young, the company’s robust growth at home with a focus on wealth management and investment banking through megadeals is vital to becoming Asia’s leading financial player by 2015.

In Korea, Daewoo Securities is facing a dynamic transformation of the financial market including changes in regulations and the introduction of new instruments.

In an environment where brokerages could find new opportunities, Im’s strategy is to strengthen Daewoo’s retail business, especially wealth management, although that means moving away from its pure brokerage role of sales and trading.

“Since the beginning of the year, we have pushed forward innovation in our retail business. We restructured branches, so that they are differentiated from each other depending on the size of their assets and the type of customer,” Im said.

Calling the retail business the basis of the company’s competitiveness, Im also helped set up different sales strategies for offline and online customers and new departments such as a private banking sales office.

Im’s immediate goal is raising retail customers’ assets by 10 trillion won within this year.

Daewoo Securities’ equity capital reached 2.9 trillion won at the end of 2010 and managed assets 18 trillion won. Its target for 2015 is 5 trillion won in capital and 30 trillion won in managed assets. Im said that this size is still very small compared to the Japanese giant Nomura Group whose capital is about 30 trillion won.

The timing for Im’s plan couldn’t be better. In 2010 and 2011, Korea saw and will see a rapid expansion in the wealth management sector supported by various new instruments.

Wrap accounts, fee-based accounts that “wrap” different assets including stocks and bonds into one portfolio and manage them to customers’ targets and needs, have been huge hits amid the stock market rally.

While some companies cut down on fees to compete better, Daewoo chose a different path — guaranteeing the quality of products. It claims to be the first in the industry to recall risky financial products.

There are concerns that “wrap account bubbles” could pop when the market no longer rallies because those accounts invest heavily into a few blue-chip stocks.

Daewoo Securities and Im, however, forecast that the market will recover and remain strong in the second half with the benchmark KOSPI moving between 2,000 and 2,500. That’s 100 points higher than the initial forecast of between 1,900 and 2,400.

“In the past, a bull market appeared under three conditions — a current account surplus, systemic risk management and valuation merits. I believe these elements will positively affect the Korean stock market in the second half,” Im said.

He added that the current account surplus will likely continue with weakened production in Japan and declining raw material prices despite the sluggish recovery of the U.S. economy.

Im also forecasts that the international community will keep injecting liquidity into the market to control risks from the sovereign debt crisis in southern Europe.

Another opportunity Im sees is the introduction of “Korean-style” hedge funds, for which Daewoo has been preparing for the last two years.

Kim Seok-dong, chairman of the Financial Services Commission (FSC), said in March that changes to finance laws will allow hedge funds, which invest in a wide variety of assets using a broad range of strategies to profit in both good and bad times for the economy, to operate. But it will be done in a Korean-style.

Korea currently demands private equity funds to invest 50 percent or more of their assets into restructuring companies. That limit will be gone, but Korean hedge funds will only be able borrow up to 400 percent of their total assets, while their foreign counterparts are allowed to borrow as much as they want.

When asked about the potential of the Korean-style hedge funds with such a limitation, Lim said positively, “The issues will be negotiated and solved eventually. The major concern for now is if hedge funds will be able to borrow stocks for shorting. The stock-lending market is nearly non-existent now.

“Stock holders now receive only dividends, but the creation of hedge funds will help them make profits by lending their shares. It will be just a matter of time before the lending market for shorting flourishes.”

Along with the innovation of Daewoo’s retail business, Im is trying to expand its investment banking role. This time, quality, not quantity, matters.

“In terms of investment banking, we daringly cut the allocation of resources to small-scale deals and concentrated on megadeals. As a result, Daewoo became the lead-manager for the sale of Woori Financial Group, the paid-in capital increase of LG Innotek and the initial public offering (IPO) of Korea Life Insurance,” he said.

Im said that although the recent IPO market lacks megadeals, outstanding small- and mid-size businesses caught Daewoo’s attention.

“We are currently carrying out investor relations activities for the IPO of electrical goods distributer Hi Mart. We plan to list it on the Seoul bourse at the end of June,” Im said.

He predicted that the total size of IPOs to be done this year will be 5 to 6 trillion won.