Financial groups pursue M&As

By Jhoo Dong-chan

Korea's financial industry is facing a major shakeup as major financial groups, including Shinhan and KB, are aggressively pursuing mergers and acquisitions (M&As).

Their M&A drive has two purposes. One is to strengthen their non-banking businesses to offset their high dependence on banking, and the other is to become a dominant leader by enlarging assets through inorganic growth.

To do this, they are seeking to buy insurance and securities companies. Such attempts also come as profits from their credit card businesses are decreasing due to the government's regulations to cut card fees nearly to zero.

Analysts say depending on which group will ink better M&A deals will determine the pecking order of the domestic financial industry in the coming decade.

The M&A drive in the local market is gaining momentum recently after Shinhan said it is still in talks with MBK Partners, a local private equity, to acquire a 59.15 percent share of ING Life Insurance Korea.

MBK acquired the Korean life insurance arm of the Dutch insurer ING Group in 2013 for 1.8 trillion won. ING Korea is now the nation's sixth-largest insurer with an asset volume of 31.5 trillion won ($28.09 billion). Market watchers expect Shinhan has to spend more than 2 trillion won for the takeover of its management rights.

If Shinhan buys ING Life, it will mark the biggest insurance takeover in Korea, as the life insurer reported 4.34 trillion won in revenue last year and generated a net profit of 340 billion won.

The decision would also put Shinhan in charge of two life insurers along with its existing Shinhan Life Insurance. If the group merges the two firms, it would create the nation's fifth-largest life insurer.

“If Shinhan acquires ING Korea, the group will be the nation's largest financial group by asset volume,” a Shinhan Financial Group official said.

The group's total assets are currently worth 453.28 trillion won, about 10 trillion won less than KB Financial Group.

Shinhan Financial Group Chairman Cho Yong-byoung said in his New Year's address that the group will “diversify its future business portfolio by expanding itself into global and non-banking sectors.”

Not only Shinhan but also KB Financial Group were said to have attempted to acquire management rights from MBK, but KB withdrew its bid in June because it claimed Asia's largest private equity fund was asking for too much.

“MBK Partners is asking KB to pay more in exchange for getting the management rights of ING Life and that's beyond our budget,” a KB official said.

KB is now turning its eye on other firms, as acquiring a life insurer is one of the group's goals suggested by Chairman Yoon Jong-kyoo.

“We are open to any possibility, especially for enhancing our life insurance sector,” Yoon said at his reappointment ceremony last November.

The nation's third-largest lender, Woori Bank, which aims to turn itself into a holding company by early next year, is also said to be expanding its fleet through possible acquisitions.

Woori Bank CEO Sohn Tae-seung said in December the bank is “considering acquiring a small securities or asset management firm as a short-term goal.”

According to industry sources, Woori Bank was in talks with Kyobo Life Insurance to acquire its affiliate Kyobo Securities earlier this year.

“It's true Woori displayed interest in acquiring Kyobo Securities earlier this year,” a Kyobo Life official said.

“Woori suddenly turned down its bid. We are willing to sell out our brokerage arm if the price is right.”

Kyobo Life's possible sellout of the brokerage arm is attributed to its need to recapitalize itself in a bid to satisfy the IFRS17, a set of new international reporting standards that will go into effect January 2021.

Not only Korea's commercial banks but also a Chinese financial firm is likely to join the M&A big bang in the nation's financial sector.

Chinese Anbang Insurance Group, which owns a 75.3 percent stake in the nation's seventh-largest life insurer, Tong Yang Life Insurance, and fully owns the 11th-largest, ABL Life, is being forced to liquidate its entire foreign assets by Chinese authorities after the insurance group's founder was convicted of embezzlement in May.

Analysts said that successful M&As will help financial groups create synergy among subsidiaries providing the impetus for faster growth.

“Financial groups can strengthen their marketing within their subsidiaries,” said former Daishin Securities analyst and futures trader Lee Sang-hoon.

He expects that such acquisitions will allow more financial groups to come up with total package products linking one financial subsidiary to another.

“A customer with a bank account would trade stocks through the bank's affiliate brokerage while buying insurance from another affiliate insurer. It will help diversify their business portfolio,” he said.