Banks question KakaoBank's risk management capability

KakaoBank's head office in Seongnam, Gyeonggi Province / Courtesy of KakaoBank

By Lee Min-hyung

Korea's conventional banks are questioning KakaoBank's risk management capability amid the online lender's rapid rise to become the nation's most valuable financial firm after its recent initial public offering (IPO).

The market capitalization of KakaoBank came in at 41.52 trillion won ($35.28 billion) as of Tuesday's closing price on the benchmark KOSPI. This is almost twice as large as KB Financial Group's valuation which reached up to 22 trillion won during the same period.

Before KakaoBank's attention-grabbing IPO earlier this month, KB maintained its position as the nation's largest financial holding firm.

Officials from the traditional banking industry, however, urged investors to be wary of the dramatically rapid growth of KakaoBank, which opened for business in 2017, as the sustainable growth of any financial company relies on whether they can prove their credibility to customers on a long-term basis.

“The financial industry is somewhat different from other industrial sectors, such as tech-driven ones, as any financial firm may collapse in a short period of time after losing credibility from customers due to possible security loopholes or weak risk management capabilities,” a banking industry source said.

“This does not mean that KakaoBank is exposed to more external risk factors than conventional lenders, but the internet-only bank needs time to build up credibility with customers for its sustainable, longer-term growth,” according to the official.

Another bank industry official also argued that KakaoBank needs to place a top priority on enhancing its compliance and risk management capabilities now that it succeeded in expanding its size in terms of market capitalization.

“The worst-case scenario for any financial firm is their involvement in scandals over weak risk management practices,” the source said. “It takes a considerable amount of time for them to build trust from customers, but they can leave the companies overnight due to such scandals.”

KakaoBank shares continued its rally on Tuesday and closed at 87,400 won per share, up 14.1 percent from the previous trading day.

Analysts claimed KakaoBank is somewhat overvalued in the market, and the company is required to prove whether its platform-driven banking business generates stable and differentiated earnings from conventional banks.

“Our proper valuation on KakaoBank is around 27 trillion won,” eBest Investment & Securities analyst Jun Bae-seung said. “The company needs to demonstrate it can continue to expand its business portfolio.”

On Tuesday, KakaoBank reported a net profit of 115.9 billion won in the first half of 2021, up 156 percent from the previous year. The company's sales also jumped by 23.1 percent to come in at 478.5 billion won during the same period.