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Riding Korea's big tiger
A former brokerage chief with a knack for market timing, Kim Jung Tae is trying to combine two of the country's biggest banks and remake its financial system. At risk: a remarkable winning streak.
A former brokerage chief with a knack for market timing, Kim Jung Tae is trying to combine two of the country's biggest banks and remake its financial system. At risk: a remarkable winning streak.
By Donald Kirk
November 2002
Institutional Investor Magazine
Whenever a company faces a crisis in South Korea, banks have to die," says Choi Buhm Soo, who ought to know. Since 1997, Choi, who until recently was an economist at the government's leading economic think tank, the Korea Development Institute, has watched more than a dozen lenders succumb to one corporate crisis after another, leaving the country with just 12 commercial banks.
So when Choi gave up his plum job as a government bureaucrat last year to join the private sector, where did he decide to go? A bank, of course: Kookmin Bank. Why? Simply put, Choi wanted to be involved with one of Asia's boldest experiments in financial reform.
Following an unusual merger last year with Housing & Commercial Bank, Kookmin today ranks as South Korea's biggest -- and by all accounts, its most progressive -- financial institution. Celebrating its first anniversary this month, the new Kookmin, a union of the first- and third-biggest banks in the country, is one formidable operation. With $166 billion (204.8 trillion won) in assets and 1,187 branches, the very profitable Kookmin serves more than half of South Korea's 49 million citizens: It holds roughly 50 percent of the country's mortgages, issues more credit cards than any other local bank and lends to nearly every major domestic company. The country's second-largest bank, Woori Bank, has less than half its assets.
Just as impressive as its size, though, is the merged company's avowed mission: to lead South Korea into a new financial era in which banks don't cave in to business or government pressure to make more money available every time a big company or conglomerate gets in a jam. In blessing Kookmin's megamerger, the government hoped to create a huge institution with a healthy balance sheet, transparent accounting, top-notch technology and first-rate risk controls that could push the country's banking system toward modernization. Kookmin, it is hoped, will force other South Korean banks, a docile group that has for years accepted government dictates, to pay closer attention to market forces. Kookmin, says Choi, is the "big tiger" South Korea needs to drive change.
"The mission is to change the banking system in Korea," explains Choi. On that front the country is "still in the boat in the middle of the river."
If Kookmin is that boat, the man at the helm is its unorthodox chief executive, Kim Jung Tae. Blunt, decisive, aggressive, Kim, 55, wasn't even a banker until 1998, when he jumped from his post as the head of midtier brokerage house Dongwon Securities Co. to take charge of H&CB. A highly regarded manager who has adopted many Western banking practices, Kim was tapped to oversee the consolidation of the two operations even though his institution was the junior partner. The directors of the merged outfit wanted someone who could bring to the new Kookmin the market-based discipline and management sophistication that Kim had instilled in H&CB.
Kim also had a reputation for an uncanny sense of timing. In 1997 he paid down almost all of Dongwon's bank loans just months before the Asian crisis hit, enabling the debt-free brokerage to avoid the ensuing cascade of financial failures. Early on in his tenure at H&CB, Kim yanked the bank's loans to South Korea's second-biggest conglomerate, or chaebol, the Daewoo group, a collection of several dozen companies whose scandal-ridden collapse in 1999 forced the government to take over two of its chief lenders. More recently, the tough-minded Kim led a group of banks in writing down a big portion of their loans to troubled chip maker Hynix Semiconductor and selling off the rest, thus dodging the worst of a big problem that has left several South Korean lenders running the company.
Skill or luck? As with most successful businessmen who have pulled themselves up by their bootstraps, it's probably a little of both. Kim has skillfully maneuvered himself into position to benefit from good fortune. Now the energetic CEO is working full out to revamp Kookmin (the name means the "nation's people" in Korean), trying to raise it from the clubby confines of South Korea's banking scene to global prominence.
"The goal is to become a world-class bank," declares Kim. "When we merged we adopted the same policies as at H&CB, made the same level of standards."
That includes everything from adherence to U.S. generally accepted accounting principles to spending millions on the installation of sophisticated new technology to strengthen corporate and retail risk management systems, while opening up new sales opportunities in insurance and asset management. Kim has been paring branches and staff and writing down risky loans to clean up the bank's balance sheet. He has installed a brace of outsiders in key management posts, including Donald MacKenzie, a former country manager for ING Bank in Japan who is on loan as the bank's chief risk officer. In September Kookmin, now the 68th-largest bank in the world, rolled out a new brand image, KB *b (the small star contains a lowercase "k"). The name, which appears on Kookmin branches, is intended to reflect the bank's transition from "conservative and civilian" to "leading and future-oriented."
For now, most observers are impressed by the job Kim has done, though there are some lingering concerns. Kookmin is predominantly a retail bank, and the South Korean economy, driven in recent years by consumer spending, is cooling. That poses a risk for banks that have feasted on the voracious borrowing of consumers, whose debts reached $331 billion in June, more than double the amount of just four years ago. The government was sufficiently concerned earlier this year to order the banks to put aside more reserves to cover possible defaults. And in late October Kookmin's credit card subsidiary reported a 15.5 percent drop in third-quarter net income as it provisioned more heavily to meet the government's requirements.
"We have some concern about the size of the credit card loans at the moment," concedes Yoon Jyong Kyoo, Kookmin's chief financial officer. But he says the bank, among other things, is reducing the limits on cash advances, cutting the size of credit lines for certain cardholders, refusing to roll over or extend further loans to late billpayers and screening applicants more rigorously. In addition all Kookmin branches are working more seriously on collection.
The concerns about Kookmin's exposure to a possibly tapped-out local consumer has trimmed about 35 percent (in local terms) off Kookmin shares this year. That performance is far worse than the Korean Stock Exchange's 5 percent drop.
Still, most banking analysts praise the strides Kim and Kookmin have taken in their first year. "In terms of information technology or corporate culture, it's too early to judge the results," says Kwon Jae Jung, a research fellow at the Korea Institute of Finance, a quasi-independent organization supported by banks. "But in every respect Kookmin is at the top level. No other bank can beat it." One measure of its success: The bank's card subsidiary reported in October that it had 12.3 million clients, a 25 percent gain over last year.
KIM'S RISE TO THE TOP OF SOUTH KOREA'S financial world has been as startling as some of the changes he's making. Born in South Cholla Province, a relatively poor, isolated region in the southwestern corner of the Korean peninsula, he grew up doing chores on his father's rice farm. Like many from the rural province, which was bypassed during South Korea's rapid postwar development that favored urban areas, Kim burned with a special determination to succeed, focusing at his father's behest on schoolbooks rather than the farm. (President Kim Dae Jung, the region's favorite son, also exemplified this trait, rising from poor beginnings and embracing dissident views to become the country's most powerful politician.)
After finishing high school in Kwangju, the province's leading city, Kim won admittance to South Korea's elite Seoul National University, where tuition was a pittance compared with that at private universities. He studied business and later earned a master's degree in international business but, like many others from South Cholla, couldn't afford to pursue an interest in teaching; he accepted a low-level job in the research department of Cho Hung Bank, a job he likens today to "military service" because of its rigidity. After a brief stay there and at a small merchant bank, he moved to Daishin Securities Co., where he spent six years. In 1982 he joined Dongwon Securities and stayed for the next 16 years, working in a variety of mostly sales and marketing posts before becoming chief executive officer in 1997.
At Dongwon Kim gained respect as a leader who wasn't afraid to try a different course. Before his elevation to the firm's top spot, Kim repeatedly pushed new ideas and was a devotee of business seminars. Like many Western executives, he didn't like bloated management hierarchies. "He knew how to delegate power to his juniors," says one former aide. "He not only worked hard, he studied hard."
Once he was named CEO, Kim instituted his most famous policy change. "Back then it was conventional practice to borrow trillions of won [to make stock market investments]. That's how we managed," he explains. However, Kim didn't like the idea of running an investment firm on borrowed money. So he paid off all of the firm's bank debt in September 1997. His decision was quickly vindicated when Dongwon escaped the worst of the Asian financial crisis that culminated in the $58 billion International Monetary Fund bailout of South Korea that December. "I just wanted to play it safe," Kim recalls.
"Dongwon could have gone under if he hadn't paid back the loans," says a colleague.
Dongwon not only survived -- it thrived. Fearful of losing their cash as brokerages collapsed, investors poured trillions of won per month into debt-free Dongwon as news of its president's timely loan repayment spread. Previously an also-ran, Dongwon became South Korea's fifth-largest securities firm just after the crisis -- and its most profitable.
Accounts of Kim's market savvy found a receptive audience in the directors of H&CB, a onetime government-owned institution created to handle all of South Korea's mortgage- and home-related lending, which had been privatized in 1995. Having watched the government take over several failed rivals as the crisis unfolded, the bank's board wanted a strong new leader who would keep their company out of harm's way. The fact that Kim was not a banker beholden to a chaebol or a government official given to consensus management was deemed an asset.
So in August 1998 Kim became the first nonbanker ever named to run a major South Korean bank. He took a personal gamble and asked to receive a hefty portion of his compensation in stock options. The gesture underscored his promise to deliver profits quickly.
Banking soon proved to be a different world. "I had hands-on experience and research outside banking analyzing investment risks for 24 years in the securities industry. I didn't have an understanding of the industry but felt the need for restructuring and downsizing," says Kim. One conclusion he came to rapidly was that bankers didn't fully understand that their enormous loans were often supporting badly managed enterprises that couldn't survive without a constant supply of new credit.
Kim set out to modernize H&CB, meeting with thousands of workers "to share a vision, to have a common goal, to be on the same page." His personal touch contrasted favorably with other senior South Korean bank executives whose rare employee meetings tended to be formal and carefully scripted. His three main goals: revenue-making, transparency of accounting and a merit-based performance system. He spent lavishly to upgrade the bank's IT systems to monitor risk more carefully and provide more services to its key market, consumers. And to cut costs Kim slashed nearly 3,000 employees, bringing the $60 billion-in-assets H&CB's head count down to 10,000.
Kim has tried to model himself after two titans of the U.S. corporate scene: the former chiefs of General Electric Co. and Intel Corp., Jack Welch and Andy Grove. While still at H&CB, he even tried to visit GE's famous training center in Crotonville, New York (because he wasn't a GE vendor, his bid was rebuffed). He hands out a Korean translation of Jack Welch: Straight from the Gut to his employees. "I want them to study his style of business restructuring, his audacious management style."
Kim admires Grove's boldness as well. "In 1984 he made the major decision to sell off his memory-chip business and to switch into nonmemory chips," Kim says. "This was a very forward-looking decision. That's when South Korea was just starting in the semiconductor business. It was amazing to see a CEO with that kind of vision." (Kim did get a tour of Intel's Santa Clara, California, headquarters but no face-to-face meeting with Grove. "Someday I hope to.")
As at Dongwon, Kim challenged conventional operating custom at H&CB. Barely a few months into his new job, he reviewed the bank's $2 billion in credit lines to the Daewoo group, the powerful chaebol involved in everything from carmaking to shipbuilding to finance. Kim didn't like the companies' business practices; he had never recommended or owned the shares as a broker at Dongwon. By calling as many Daewoo loans as he could, Kim cut the bank's exposure by more than 80 percent, to less than $300 million, and forced other lenders to pick up the slack. The chaebol's founder, Kim Woo Choong, was incensed. "H&CB became the enemy of all Daewoo. Most of the people in the other banks believed Daewoo could not die," explains an H&CB colleague. "All the presidents of the Daewoo group companies came to my office," says Kim, who refused to budge.
His foresight paid off. Its businesses under severe pressure, the Daewoo group collapsed in mid-1999, leaving more than $80 billion in liabilities and a trail of burned banks in its wake. Worst hit were Korea First Bank and SeoulBank, which became government wards. Kim Woo Choong disappeared in late 1999, reportedly to Europe, where he is said to be in hiding today. Kim says that nearly everybody from Daewoo who visited his office either wound up in jail or, at the least, out of a job.
H&CB, on the other hand, prospered. With its more efficient infrastructure and relatively small corporate loan exposure, it became a major beneficiary of South Korea's resurgent, consumer-driven economy. As mortgage and other household loans multiplied and credit card usage increased, H&CB returned to the black in 1998, reporting a profit of more than $200 million for the year. That same year Kim had attracted a significant overseas investor, ING Bank, which provided expertise and $276 million in new capital. Just before to the Kookmin merger, H&CB had boosted profits to more than $600 million for the first three quarters of 2001. H&CB shares, which Kim listed as American depositary receipts on the New York Stock Exchange in 2000, rose from less than $3 a share on his arrival to nearly $30 a share in late 2001.
Kim's fight with Daewoo and H&CB's improving returns caught the eye of Henry Cornell, a Goldman, Sachs & Co. managing director in charge of Asia business who oversaw the 16 percent stake the firm had bought in Kookmin Bank in 1999 for $500 million. By 2001 Cornell was increasingly interested in the idea, pushed by government analysts like Choi and the local media, of a big merger to drive financial reform.
"Kookmin was very prominent in consumer finance and had a reasonable mortgage business. H&CB was terrific in mortgages," Cornell explains. "By creating a superlarge institution, you would send a message: This would be a dominant institution. You would improve the entire standing of the banking business in Korea. The two business lines of the banks were naturally complementary."
Kim agreed that the businesses blended well and was further intrigued because both institutions were healthy. His big foreign investor, ING Bank, also liked the idea. Still, Kim wanted to evaluate other options first, particularly links with smaller institutions, in which H&CB would clearly be the senior partner. Kim spoke with several smaller private banks, including Hana Bank, Koram Bank and Shinhan Bank, but none wanted to be swallowed up by H&CB. ING executives encouraged him to approach Kim Sang Hoon, who had held senior posts at the Bank of Korea and Financial Supervisory Service (South Korea's financial regulator) before being installed as Kookmin's chairman and CEO in 1998.
For Kookmin the deal offered a way to take its mortgage and housing loan business to a whole new level and create an institution that was the largest in South Korea by a huge margin with enormous market power.
The merger was closed in November 2001, but not without a lively debate over who would run the combined entity. H&CB's Kim was the favorite of ING and of foreign investors, an influential force who now own 70 percent of Kookmin's shares. Yet Kookmin's Kim was also a highly respected figure, and his bank, roughly 50 percent bigger, with $90 billion in assets, was technically the acquirer. He also had the initial support of Goldman, which had pushed the transaction. In the end, the strong credentials of H&CB's Kim won over the selection committee, including a Goldman representative. "We had great respect for him," says Cornell. "It was clear he had the managerial skill to lead a successful integration." Kim Sang Hoon was named chairman of the new Kookmin, a largely ceremonial post.
On paper, at least, Kookmin absorbed H&CB first by closing the old Kookmin and then by giving H&CB shareholders 1.6 shares in the new Kookmin for each of their H&CB shares, while honoring old Kookmin shares at a rate of 1-to-1 in the new Kookmin. H&CB shareholders wound up holding 599.6 billion won worth of Kookmin shares worth approximately $500 million at par value. In fact, says a Goldman Sachs source, the shares were worth about eight times their par value, or $4 billion, at prevailing market prices. Although the Kookmin name survived, both banks were shut down and a new entity was formed. The government retains a 9 percent share of the merged institution based on its previous 14 percent holding of H&CB and its 6 percent Kookmin stake.
Meanwhile, the value of CEO Kim's options skyrocketed. Under the final terms H&CB's stock was worth nearly $40 a share, a 15-fold gain over the share value when Kim joined the bank. It is estimated that he netted more than $30 million in all, an astronomical figure in South Korea, where only family owners of big businesses ever can aspire to such a payday. Kim associates say he's given a very significant portion of his take to charities.
KIM WASTED LITTLE TIME IN TACKLING HIS NEW challenges. One of his first moves was to appoint 15 senior level executives who report directly to him. Of this group, six come from outside either bank, five from the old Kookmin and four from H&CB. "One way to smooth the merger process was by recruiting to improve the quality of management," says one of the outsiders. Kim talks of bringing in more foreign executives but -- aside from MacKenzie, the ING Bank executive who's revamping all of Kookmin's risk architecture -- has so far preferred to use outsiders mostly as consultants.
Kim is hoping to build a better-educated staff that can overcome South Korea's traditional reluctance to accept foreign ideas and influences. One new Kookmin program will pay for potential managers to get their MBAs abroad. Even if many of them take jobs elsewhere, Kim says, "it will be money well spent."
While trying to build a stronger cadre of workers, Kim has trimmed staff, doing away with several layers of management and eliminating about 500 employees, many through early retirement. In September the bank announced plans to close about 50 overlapping branches by the end of the year.
At the heart of Kookmin's new regime is advanced technology and more sophisticated risk management. Kim envisions an advanced IT system comparable to those in use at the biggest U.S., European and Japanese banks. Kookmin CFO Yoon, who was hired last March from the bank's auditor, PricewaterhouseCoopers, where he was a senior partner in Seoul, explains that Kookmin will eventually have a risk management program that will incorporate credit and behavior scoring for all its clients and potential clients. He notes that Kookmin will also have a full credit relationship management system so that the bank can analyze each individual customer's debt profile.
Kookmin will shift its lending focus more heavily toward retail customers and small and medium-size enterprises as these systems are installed, says risk executive MacKenzie. The plan is to sell even more products and services, such as insurance and asset management, to retail customers. As of September, Kookmin's retail loans, including mortgages and household credits, totaled $55.3 billion, compared with $31.4 billion of corporate loans. Although the total volume of corporate loans won't necessarily change, "as a percentage, lending to large corporates will decline," says MacKenzie.
Kim aims to continue to trim risky corporate loans. By refusing to renew some credit lines and selling off others, the combined Kookmin has slashed its nonperforming loans from $5.1 billion to about $3.8 billion since the merger. Not long after the deal closed, Kookmin bankers, at Kim's behest, led a group of nine banks that agreed to write off 75 percent of their loans to sinking chip maker Hynix. Ahead of most of its banking rivals, Kookmin took a $42 million loss on loans to Hynix by converting the company's bonds to equity and then unloading most of the shares. The decision to sell, while provisioning for nearly $30 million worth of Hynix loans, sent Kookmin's second-quarter profit down to $413 million, compared with a pro forma $638 million (at the exchange rate of 1,200 won to the dollar) total profit for Kookmin and H&CB in the same period in 2001. Kim, however, was glad to accept the diminished profit as he watched other Hynix creditors try to sort out the problems at the money-losing manufacturer that was drowning in $6.3 billion of debt.
To be sure, Kookmin has issues to deal with. Not least are the cultural divisions between the legacy banks and uncertainty as management sorts everyone's role out. Generally, the old Kookmin's systems and procedures were less up to date than H&CB's, which has caused some discontent. As he did in his early days at H&CB, Kim has held extensive staff meetings throughout the two banks to inform everyone of changes and new initiatives. Sensitivity to such political differences can be seen in the bank's awkward arrangement of its headquarters. A year after the merger, Kookmin has three main offices: H&CB's, Kookmin's and Long Term Credit Bank's, part of a previous Kookmin acquisition. Kim works from each. There are vague plans to build a single skyscraper, but that likely is years off.
A bigger issue is the level of consumer credit in the country and at the bank. The Financial Supervisory Service is closely monitoring consumer lending to make sure the banks don't overdo it. The government has also heightened its surveillance and instructed banks to make sure they have appropriate loan-loss provisions.
Han Duck Soo, who until recently was senior secretary for economic affairs to President Kim, takes pains to explain how much the recent consumer lending problem differs from the chaebols' borrowing binge. "There is no irrational supply of funds. Individuals of good credit standing are the best clients for the banks. The question is whether a high accumulation of loans might be dangerous. We don't think there is a high level of risk. In terms of the ratio of loans, it is still low compared with other countries."
CFO Yoon says, however, that Kookmin, while taking measures to protect itself from credit card risks, still has a delinquency rate of about 10 percent and expects nonpayments of 4 percent on credit card loans extended at an interest rate of 20 percent. The bank may have to do more, judging by its third-quarter profit report. Due in part to additional provisioning for bad loans, net income fell to $283 million, down 29 percent from the second quarter. Even so, questions remain about whether the $288 million provisioned in the third quarter adequately protects the bank, given its huge retail portfolio, from a further rise in delinquencies.
IN SPITE OF THESE WORRIES, KOOKMIN WANTS THE world to know it's a new bank with a new brand. On September 23 it unveiled the new KB *b logo. The arrival of a unified brand coincides with the complicated integration of the old Kookmin and H&CB technology systems into a unified platform. The hope, says Choi, is that the KB label will be readily recognizable all over South Korea.
The revision has a secondary function as well. The refashioned brand, says Choi, should mark the start of the modern era in South Korean banking. This new bank "will pursue the best risk management for the benefit of shareholders," a far cry from the days when the government ordered banks, many of which it owned (Kookmin and H&CB among them), to make unsound loans to the chaebol. "We are putting emphasis on commercialism, not government policy," says Choi. "By establishing a high standard of credit, we can prevent another banking crisis."
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Foreign influences
As in many of the recent shifts in the South Korean financial system, foreign investors helped push the linkup between Kookmin Bank and Housing & Commercial Bank. The outsiders, as one banker puts it, are a "spur to change."
The Kookmin-H&CB merger featured two influential foreign participants pursuing different goals. GS Capital Partners, a Goldman, Sachs & Co. unit that invested $500 million (623.5 billion won) for a 16 percent stake in Kookmin's predecessor in June 1999, is a financial buyer. ING Bank, which spent $276 million for 9.9 percent of H&CB in 1998, is a long-term strategic investor. Goldman has already unloaded a big chunk of its initial investment at a tidy profit, while ING is thinking about doubling its holding in the combined bank to about 8 percent to 10 percent; Goldman holds roughly 5.4 percent of the new Kookmin.
ING and Goldman both endorsed the concept of creating a dominant financial institution catering to South Korea's growing retail market early on and helped make the introductions between H&CB chief Kim Jung Tae and Kookmin CEO Kim Sang Hoon. Although Goldman initially backed Kookmin's Kim to run the combined bank, it ultimately acceded to the wishes of ING and other shareholders to install his rival.
H&CB's Kim is "very market-oriented compared to any CEO of a Korean bank," says Yoon Kyung Hee, ING's country manager for South Korea and a Kookmin board member. Henry Cornell, who runs Goldman's Asian business from New York and also serves as a Kookmin board member, acknowledges that "at the end of the day, he was the best man." The "old" Kookmin's Kim is now chairman of the combined bank, with little day-to-day power.
In May Goldman's investment banking unit converted 11 million shares of Kookmin stock, listed on the New York Stock Exchange and the Seoul Stock Exchange, into American depositary receipts and sold them all. Goldman could hardly have been more pleased with the results. "The big challenge in Korea is getting out. Investing is one third of the test," says a Goldman executive involved in the sale. "We thought it was a good time to sell. Rarely do you unload that much at one time."
Indeed, Goldman netted approximately $700 million and held on to about $900 million worth of shares that are now worth between $500 million and $600 million as a result of the South Korean market's sharp decline. Even so, the firm has generated an estimated 40 percent internal rate of return in barely three years on its investment, with the potential for much more once the local market improves.
Although there was some local concern about the impact of the sale (Kookmin shares fell more than 4 percent locally when news of the ADR sale broke), Cornell is unapologetic. Goldman, he notes, first broached the idea of an investment with Kookmin management in the middle of 1998 -- a crisis environment very different from today's. "We thought our capital could help them through," Cornell explains. Last spring's share sale, he adds, opened a new capital market to Kookmin in the U.S. that it can access in the future. "We are here to help the bank," says Cornell, "but this is a pure investment."
While ING was also investing in an undervalued bank in the midst of the financial crisis, its relationship and objectives differ. The Dutch bank wanted to use the H&CB stake as a launching pad into South Korea's potentially huge and untapped bancassurance market. ING established ING Life Korea, an insurance affiliate, in 1991 and eventually plans to sell insurance products through a banking channel. The new Kookmin assumed a 20 percent stake H&CB held in ING Life Korea, which sells its insurance through local agents. Together Kookmin and ING are creating a joint venture within ING Life that could grow into another partnership devoted to bank insurance sales.
One problem: The government was supposed to permit bank sales of insurance last year, but financial regulators recently postponed approval until August 2003. Until then, ING and Kookmin are focusing on training and information technology readiness. "ING brings the insurance expertise, and Kookmin brings the distribution" via its 1,187 branches, says Donald MacKenzie, an ING executive who's overseeing an overhaul of Kookmin's risk management operation.
The second ING-Kookmin initiative is KB Investment Trust Management Co., a former division of H&CB that was renamed after the merger. This project, in which ING has a 20 percent interest, offers a variety of investment products to South Korean customers. KBITM now oversees $9.17 billion in assets, making it the fifth-largest Korean money manager. The company sells its products through banks, notably Kookmin, and securities firms.
In spite of the occasional setbacks, Goldman and ING have had a smoother ride in South Korea than have some of their foreign rivals. U.S. private equity firm Newbridge Capital, which acquired 51 percent of Korea First Bank in 1999, has ruffled government and banking feathers by refusing to roll over certain corporate loans and by forcing the government to live up to its agreement to absorb bad debts. That unhappiness may have affected the government's decision in August to reject a buyout offer for SeoulBank from Dallas-based Lone Star Fund, a specialist in distressed properties. Instead, the government gave the deal to local Hana Bank.
Commerzbank, which owns a minority stake in the government-controlled Korea Exchange Bank, has had its own headaches. Against the German bank's wishes, KEB went ahead with a controversial refinancing of Hynix Semiconductor earlier this year that has left the South Korean bank as a big equity investor in an extremely troubled company.
How have Goldman and ING managed to avoid such troubles? "ING has been investing in markets like Korea for 30 years," says MacKenzie. "Goldman is one of the best firms in the world. Our success was due in part to the openness of the relationship between the team in Korea and the investors, Goldman and ING." No doubt fortuitous timing helped as well. -- D.K.
By Donald Kirk
November 2002
Institutional Investor Magazine
Whenever a company faces a crisis in South Korea, banks have to die," says Choi Buhm Soo, who ought to know. Since 1997, Choi, who until recently was an economist at the government's leading economic think tank, the Korea Development Institute, has watched more than a dozen lenders succumb to one corporate crisis after another, leaving the country with just 12 commercial banks.
So when Choi gave up his plum job as a government bureaucrat last year to join the private sector, where did he decide to go? A bank, of course: Kookmin Bank. Why? Simply put, Choi wanted to be involved with one of Asia's boldest experiments in financial reform.
Following an unusual merger last year with Housing & Commercial Bank, Kookmin today ranks as South Korea's biggest -- and by all accounts, its most progressive -- financial institution. Celebrating its first anniversary this month, the new Kookmin, a union of the first- and third-biggest banks in the country, is one formidable operation. With $166 billion (204.8 trillion won) in assets and 1,187 branches, the very profitable Kookmin serves more than half of South Korea's 49 million citizens: It holds roughly 50 percent of the country's mortgages, issues more credit cards than any other local bank and lends to nearly every major domestic company. The country's second-largest bank, Woori Bank, has less than half its assets.
Just as impressive as its size, though, is the merged company's avowed mission: to lead South Korea into a new financial era in which banks don't cave in to business or government pressure to make more money available every time a big company or conglomerate gets in a jam. In blessing Kookmin's megamerger, the government hoped to create a huge institution with a healthy balance sheet, transparent accounting, top-notch technology and first-rate risk controls that could push the country's banking system toward modernization. Kookmin, it is hoped, will force other South Korean banks, a docile group that has for years accepted government dictates, to pay closer attention to market forces. Kookmin, says Choi, is the "big tiger" South Korea needs to drive change.
"The mission is to change the banking system in Korea," explains Choi. On that front the country is "still in the boat in the middle of the river."
If Kookmin is that boat, the man at the helm is its unorthodox chief executive, Kim Jung Tae. Blunt, decisive, aggressive, Kim, 55, wasn't even a banker until 1998, when he jumped from his post as the head of midtier brokerage house Dongwon Securities Co. to take charge of H&CB. A highly regarded manager who has adopted many Western banking practices, Kim was tapped to oversee the consolidation of the two operations even though his institution was the junior partner. The directors of the merged outfit wanted someone who could bring to the new Kookmin the market-based discipline and management sophistication that Kim had instilled in H&CB.
Kim also had a reputation for an uncanny sense of timing. In 1997 he paid down almost all of Dongwon's bank loans just months before the Asian crisis hit, enabling the debt-free brokerage to avoid the ensuing cascade of financial failures. Early on in his tenure at H&CB, Kim yanked the bank's loans to South Korea's second-biggest conglomerate, or chaebol, the Daewoo group, a collection of several dozen companies whose scandal-ridden collapse in 1999 forced the government to take over two of its chief lenders. More recently, the tough-minded Kim led a group of banks in writing down a big portion of their loans to troubled chip maker Hynix Semiconductor and selling off the rest, thus dodging the worst of a big problem that has left several South Korean lenders running the company.
Skill or luck? As with most successful businessmen who have pulled themselves up by their bootstraps, it's probably a little of both. Kim has skillfully maneuvered himself into position to benefit from good fortune. Now the energetic CEO is working full out to revamp Kookmin (the name means the "nation's people" in Korean), trying to raise it from the clubby confines of South Korea's banking scene to global prominence.
"The goal is to become a world-class bank," declares Kim. "When we merged we adopted the same policies as at H&CB, made the same level of standards."
That includes everything from adherence to U.S. generally accepted accounting principles to spending millions on the installation of sophisticated new technology to strengthen corporate and retail risk management systems, while opening up new sales opportunities in insurance and asset management. Kim has been paring branches and staff and writing down risky loans to clean up the bank's balance sheet. He has installed a brace of outsiders in key management posts, including Donald MacKenzie, a former country manager for ING Bank in Japan who is on loan as the bank's chief risk officer. In September Kookmin, now the 68th-largest bank in the world, rolled out a new brand image, KB *b (the small star contains a lowercase "k"). The name, which appears on Kookmin branches, is intended to reflect the bank's transition from "conservative and civilian" to "leading and future-oriented."
For now, most observers are impressed by the job Kim has done, though there are some lingering concerns. Kookmin is predominantly a retail bank, and the South Korean economy, driven in recent years by consumer spending, is cooling. That poses a risk for banks that have feasted on the voracious borrowing of consumers, whose debts reached $331 billion in June, more than double the amount of just four years ago. The government was sufficiently concerned earlier this year to order the banks to put aside more reserves to cover possible defaults. And in late October Kookmin's credit card subsidiary reported a 15.5 percent drop in third-quarter net income as it provisioned more heavily to meet the government's requirements.
"We have some concern about the size of the credit card loans at the moment," concedes Yoon Jyong Kyoo, Kookmin's chief financial officer. But he says the bank, among other things, is reducing the limits on cash advances, cutting the size of credit lines for certain cardholders, refusing to roll over or extend further loans to late billpayers and screening applicants more rigorously. In addition all Kookmin branches are working more seriously on collection.
The concerns about Kookmin's exposure to a possibly tapped-out local consumer has trimmed about 35 percent (in local terms) off Kookmin shares this year. That performance is far worse than the Korean Stock Exchange's 5 percent drop.
Still, most banking analysts praise the strides Kim and Kookmin have taken in their first year. "In terms of information technology or corporate culture, it's too early to judge the results," says Kwon Jae Jung, a research fellow at the Korea Institute of Finance, a quasi-independent organization supported by banks. "But in every respect Kookmin is at the top level. No other bank can beat it." One measure of its success: The bank's card subsidiary reported in October that it had 12.3 million clients, a 25 percent gain over last year.
KIM'S RISE TO THE TOP OF SOUTH KOREA'S financial world has been as startling as some of the changes he's making. Born in South Cholla Province, a relatively poor, isolated region in the southwestern corner of the Korean peninsula, he grew up doing chores on his father's rice farm. Like many from the rural province, which was bypassed during South Korea's rapid postwar development that favored urban areas, Kim burned with a special determination to succeed, focusing at his father's behest on schoolbooks rather than the farm. (President Kim Dae Jung, the region's favorite son, also exemplified this trait, rising from poor beginnings and embracing dissident views to become the country's most powerful politician.)
After finishing high school in Kwangju, the province's leading city, Kim won admittance to South Korea's elite Seoul National University, where tuition was a pittance compared with that at private universities. He studied business and later earned a master's degree in international business but, like many others from South Cholla, couldn't afford to pursue an interest in teaching; he accepted a low-level job in the research department of Cho Hung Bank, a job he likens today to "military service" because of its rigidity. After a brief stay there and at a small merchant bank, he moved to Daishin Securities Co., where he spent six years. In 1982 he joined Dongwon Securities and stayed for the next 16 years, working in a variety of mostly sales and marketing posts before becoming chief executive officer in 1997.
At Dongwon Kim gained respect as a leader who wasn't afraid to try a different course. Before his elevation to the firm's top spot, Kim repeatedly pushed new ideas and was a devotee of business seminars. Like many Western executives, he didn't like bloated management hierarchies. "He knew how to delegate power to his juniors," says one former aide. "He not only worked hard, he studied hard."
Once he was named CEO, Kim instituted his most famous policy change. "Back then it was conventional practice to borrow trillions of won [to make stock market investments]. That's how we managed," he explains. However, Kim didn't like the idea of running an investment firm on borrowed money. So he paid off all of the firm's bank debt in September 1997. His decision was quickly vindicated when Dongwon escaped the worst of the Asian financial crisis that culminated in the $58 billion International Monetary Fund bailout of South Korea that December. "I just wanted to play it safe," Kim recalls.
"Dongwon could have gone under if he hadn't paid back the loans," says a colleague.
Dongwon not only survived -- it thrived. Fearful of losing their cash as brokerages collapsed, investors poured trillions of won per month into debt-free Dongwon as news of its president's timely loan repayment spread. Previously an also-ran, Dongwon became South Korea's fifth-largest securities firm just after the crisis -- and its most profitable.
Accounts of Kim's market savvy found a receptive audience in the directors of H&CB, a onetime government-owned institution created to handle all of South Korea's mortgage- and home-related lending, which had been privatized in 1995. Having watched the government take over several failed rivals as the crisis unfolded, the bank's board wanted a strong new leader who would keep their company out of harm's way. The fact that Kim was not a banker beholden to a chaebol or a government official given to consensus management was deemed an asset.
So in August 1998 Kim became the first nonbanker ever named to run a major South Korean bank. He took a personal gamble and asked to receive a hefty portion of his compensation in stock options. The gesture underscored his promise to deliver profits quickly.
Banking soon proved to be a different world. "I had hands-on experience and research outside banking analyzing investment risks for 24 years in the securities industry. I didn't have an understanding of the industry but felt the need for restructuring and downsizing," says Kim. One conclusion he came to rapidly was that bankers didn't fully understand that their enormous loans were often supporting badly managed enterprises that couldn't survive without a constant supply of new credit.
Kim set out to modernize H&CB, meeting with thousands of workers "to share a vision, to have a common goal, to be on the same page." His personal touch contrasted favorably with other senior South Korean bank executives whose rare employee meetings tended to be formal and carefully scripted. His three main goals: revenue-making, transparency of accounting and a merit-based performance system. He spent lavishly to upgrade the bank's IT systems to monitor risk more carefully and provide more services to its key market, consumers. And to cut costs Kim slashed nearly 3,000 employees, bringing the $60 billion-in-assets H&CB's head count down to 10,000.
Kim has tried to model himself after two titans of the U.S. corporate scene: the former chiefs of General Electric Co. and Intel Corp., Jack Welch and Andy Grove. While still at H&CB, he even tried to visit GE's famous training center in Crotonville, New York (because he wasn't a GE vendor, his bid was rebuffed). He hands out a Korean translation of Jack Welch: Straight from the Gut to his employees. "I want them to study his style of business restructuring, his audacious management style."
Kim admires Grove's boldness as well. "In 1984 he made the major decision to sell off his memory-chip business and to switch into nonmemory chips," Kim says. "This was a very forward-looking decision. That's when South Korea was just starting in the semiconductor business. It was amazing to see a CEO with that kind of vision." (Kim did get a tour of Intel's Santa Clara, California, headquarters but no face-to-face meeting with Grove. "Someday I hope to.")
As at Dongwon, Kim challenged conventional operating custom at H&CB. Barely a few months into his new job, he reviewed the bank's $2 billion in credit lines to the Daewoo group, the powerful chaebol involved in everything from carmaking to shipbuilding to finance. Kim didn't like the companies' business practices; he had never recommended or owned the shares as a broker at Dongwon. By calling as many Daewoo loans as he could, Kim cut the bank's exposure by more than 80 percent, to less than $300 million, and forced other lenders to pick up the slack. The chaebol's founder, Kim Woo Choong, was incensed. "H&CB became the enemy of all Daewoo. Most of the people in the other banks believed Daewoo could not die," explains an H&CB colleague. "All the presidents of the Daewoo group companies came to my office," says Kim, who refused to budge.
His foresight paid off. Its businesses under severe pressure, the Daewoo group collapsed in mid-1999, leaving more than $80 billion in liabilities and a trail of burned banks in its wake. Worst hit were Korea First Bank and SeoulBank, which became government wards. Kim Woo Choong disappeared in late 1999, reportedly to Europe, where he is said to be in hiding today. Kim says that nearly everybody from Daewoo who visited his office either wound up in jail or, at the least, out of a job.
H&CB, on the other hand, prospered. With its more efficient infrastructure and relatively small corporate loan exposure, it became a major beneficiary of South Korea's resurgent, consumer-driven economy. As mortgage and other household loans multiplied and credit card usage increased, H&CB returned to the black in 1998, reporting a profit of more than $200 million for the year. That same year Kim had attracted a significant overseas investor, ING Bank, which provided expertise and $276 million in new capital. Just before to the Kookmin merger, H&CB had boosted profits to more than $600 million for the first three quarters of 2001. H&CB shares, which Kim listed as American depositary receipts on the New York Stock Exchange in 2000, rose from less than $3 a share on his arrival to nearly $30 a share in late 2001.
Kim's fight with Daewoo and H&CB's improving returns caught the eye of Henry Cornell, a Goldman, Sachs & Co. managing director in charge of Asia business who oversaw the 16 percent stake the firm had bought in Kookmin Bank in 1999 for $500 million. By 2001 Cornell was increasingly interested in the idea, pushed by government analysts like Choi and the local media, of a big merger to drive financial reform.
"Kookmin was very prominent in consumer finance and had a reasonable mortgage business. H&CB was terrific in mortgages," Cornell explains. "By creating a superlarge institution, you would send a message: This would be a dominant institution. You would improve the entire standing of the banking business in Korea. The two business lines of the banks were naturally complementary."
Kim agreed that the businesses blended well and was further intrigued because both institutions were healthy. His big foreign investor, ING Bank, also liked the idea. Still, Kim wanted to evaluate other options first, particularly links with smaller institutions, in which H&CB would clearly be the senior partner. Kim spoke with several smaller private banks, including Hana Bank, Koram Bank and Shinhan Bank, but none wanted to be swallowed up by H&CB. ING executives encouraged him to approach Kim Sang Hoon, who had held senior posts at the Bank of Korea and Financial Supervisory Service (South Korea's financial regulator) before being installed as Kookmin's chairman and CEO in 1998.
For Kookmin the deal offered a way to take its mortgage and housing loan business to a whole new level and create an institution that was the largest in South Korea by a huge margin with enormous market power.
The merger was closed in November 2001, but not without a lively debate over who would run the combined entity. H&CB's Kim was the favorite of ING and of foreign investors, an influential force who now own 70 percent of Kookmin's shares. Yet Kookmin's Kim was also a highly respected figure, and his bank, roughly 50 percent bigger, with $90 billion in assets, was technically the acquirer. He also had the initial support of Goldman, which had pushed the transaction. In the end, the strong credentials of H&CB's Kim won over the selection committee, including a Goldman representative. "We had great respect for him," says Cornell. "It was clear he had the managerial skill to lead a successful integration." Kim Sang Hoon was named chairman of the new Kookmin, a largely ceremonial post.
On paper, at least, Kookmin absorbed H&CB first by closing the old Kookmin and then by giving H&CB shareholders 1.6 shares in the new Kookmin for each of their H&CB shares, while honoring old Kookmin shares at a rate of 1-to-1 in the new Kookmin. H&CB shareholders wound up holding 599.6 billion won worth of Kookmin shares worth approximately $500 million at par value. In fact, says a Goldman Sachs source, the shares were worth about eight times their par value, or $4 billion, at prevailing market prices. Although the Kookmin name survived, both banks were shut down and a new entity was formed. The government retains a 9 percent share of the merged institution based on its previous 14 percent holding of H&CB and its 6 percent Kookmin stake.
Meanwhile, the value of CEO Kim's options skyrocketed. Under the final terms H&CB's stock was worth nearly $40 a share, a 15-fold gain over the share value when Kim joined the bank. It is estimated that he netted more than $30 million in all, an astronomical figure in South Korea, where only family owners of big businesses ever can aspire to such a payday. Kim associates say he's given a very significant portion of his take to charities.
KIM WASTED LITTLE TIME IN TACKLING HIS NEW challenges. One of his first moves was to appoint 15 senior level executives who report directly to him. Of this group, six come from outside either bank, five from the old Kookmin and four from H&CB. "One way to smooth the merger process was by recruiting to improve the quality of management," says one of the outsiders. Kim talks of bringing in more foreign executives but -- aside from MacKenzie, the ING Bank executive who's revamping all of Kookmin's risk architecture -- has so far preferred to use outsiders mostly as consultants.
Kim is hoping to build a better-educated staff that can overcome South Korea's traditional reluctance to accept foreign ideas and influences. One new Kookmin program will pay for potential managers to get their MBAs abroad. Even if many of them take jobs elsewhere, Kim says, "it will be money well spent."
While trying to build a stronger cadre of workers, Kim has trimmed staff, doing away with several layers of management and eliminating about 500 employees, many through early retirement. In September the bank announced plans to close about 50 overlapping branches by the end of the year.
At the heart of Kookmin's new regime is advanced technology and more sophisticated risk management. Kim envisions an advanced IT system comparable to those in use at the biggest U.S., European and Japanese banks. Kookmin CFO Yoon, who was hired last March from the bank's auditor, PricewaterhouseCoopers, where he was a senior partner in Seoul, explains that Kookmin will eventually have a risk management program that will incorporate credit and behavior scoring for all its clients and potential clients. He notes that Kookmin will also have a full credit relationship management system so that the bank can analyze each individual customer's debt profile.
Kookmin will shift its lending focus more heavily toward retail customers and small and medium-size enterprises as these systems are installed, says risk executive MacKenzie. The plan is to sell even more products and services, such as insurance and asset management, to retail customers. As of September, Kookmin's retail loans, including mortgages and household credits, totaled $55.3 billion, compared with $31.4 billion of corporate loans. Although the total volume of corporate loans won't necessarily change, "as a percentage, lending to large corporates will decline," says MacKenzie.
Kim aims to continue to trim risky corporate loans. By refusing to renew some credit lines and selling off others, the combined Kookmin has slashed its nonperforming loans from $5.1 billion to about $3.8 billion since the merger. Not long after the deal closed, Kookmin bankers, at Kim's behest, led a group of nine banks that agreed to write off 75 percent of their loans to sinking chip maker Hynix. Ahead of most of its banking rivals, Kookmin took a $42 million loss on loans to Hynix by converting the company's bonds to equity and then unloading most of the shares. The decision to sell, while provisioning for nearly $30 million worth of Hynix loans, sent Kookmin's second-quarter profit down to $413 million, compared with a pro forma $638 million (at the exchange rate of 1,200 won to the dollar) total profit for Kookmin and H&CB in the same period in 2001. Kim, however, was glad to accept the diminished profit as he watched other Hynix creditors try to sort out the problems at the money-losing manufacturer that was drowning in $6.3 billion of debt.
To be sure, Kookmin has issues to deal with. Not least are the cultural divisions between the legacy banks and uncertainty as management sorts everyone's role out. Generally, the old Kookmin's systems and procedures were less up to date than H&CB's, which has caused some discontent. As he did in his early days at H&CB, Kim has held extensive staff meetings throughout the two banks to inform everyone of changes and new initiatives. Sensitivity to such political differences can be seen in the bank's awkward arrangement of its headquarters. A year after the merger, Kookmin has three main offices: H&CB's, Kookmin's and Long Term Credit Bank's, part of a previous Kookmin acquisition. Kim works from each. There are vague plans to build a single skyscraper, but that likely is years off.
A bigger issue is the level of consumer credit in the country and at the bank. The Financial Supervisory Service is closely monitoring consumer lending to make sure the banks don't overdo it. The government has also heightened its surveillance and instructed banks to make sure they have appropriate loan-loss provisions.
Han Duck Soo, who until recently was senior secretary for economic affairs to President Kim, takes pains to explain how much the recent consumer lending problem differs from the chaebols' borrowing binge. "There is no irrational supply of funds. Individuals of good credit standing are the best clients for the banks. The question is whether a high accumulation of loans might be dangerous. We don't think there is a high level of risk. In terms of the ratio of loans, it is still low compared with other countries."
CFO Yoon says, however, that Kookmin, while taking measures to protect itself from credit card risks, still has a delinquency rate of about 10 percent and expects nonpayments of 4 percent on credit card loans extended at an interest rate of 20 percent. The bank may have to do more, judging by its third-quarter profit report. Due in part to additional provisioning for bad loans, net income fell to $283 million, down 29 percent from the second quarter. Even so, questions remain about whether the $288 million provisioned in the third quarter adequately protects the bank, given its huge retail portfolio, from a further rise in delinquencies.
IN SPITE OF THESE WORRIES, KOOKMIN WANTS THE world to know it's a new bank with a new brand. On September 23 it unveiled the new KB *b logo. The arrival of a unified brand coincides with the complicated integration of the old Kookmin and H&CB technology systems into a unified platform. The hope, says Choi, is that the KB label will be readily recognizable all over South Korea.
The revision has a secondary function as well. The refashioned brand, says Choi, should mark the start of the modern era in South Korean banking. This new bank "will pursue the best risk management for the benefit of shareholders," a far cry from the days when the government ordered banks, many of which it owned (Kookmin and H&CB among them), to make unsound loans to the chaebol. "We are putting emphasis on commercialism, not government policy," says Choi. "By establishing a high standard of credit, we can prevent another banking crisis."
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Foreign influences
As in many of the recent shifts in the South Korean financial system, foreign investors helped push the linkup between Kookmin Bank and Housing & Commercial Bank. The outsiders, as one banker puts it, are a "spur to change."
The Kookmin-H&CB merger featured two influential foreign participants pursuing different goals. GS Capital Partners, a Goldman, Sachs & Co. unit that invested $500 million (623.5 billion won) for a 16 percent stake in Kookmin's predecessor in June 1999, is a financial buyer. ING Bank, which spent $276 million for 9.9 percent of H&CB in 1998, is a long-term strategic investor. Goldman has already unloaded a big chunk of its initial investment at a tidy profit, while ING is thinking about doubling its holding in the combined bank to about 8 percent to 10 percent; Goldman holds roughly 5.4 percent of the new Kookmin.
ING and Goldman both endorsed the concept of creating a dominant financial institution catering to South Korea's growing retail market early on and helped make the introductions between H&CB chief Kim Jung Tae and Kookmin CEO Kim Sang Hoon. Although Goldman initially backed Kookmin's Kim to run the combined bank, it ultimately acceded to the wishes of ING and other shareholders to install his rival.
H&CB's Kim is "very market-oriented compared to any CEO of a Korean bank," says Yoon Kyung Hee, ING's country manager for South Korea and a Kookmin board member. Henry Cornell, who runs Goldman's Asian business from New York and also serves as a Kookmin board member, acknowledges that "at the end of the day, he was the best man." The "old" Kookmin's Kim is now chairman of the combined bank, with little day-to-day power.
In May Goldman's investment banking unit converted 11 million shares of Kookmin stock, listed on the New York Stock Exchange and the Seoul Stock Exchange, into American depositary receipts and sold them all. Goldman could hardly have been more pleased with the results. "The big challenge in Korea is getting out. Investing is one third of the test," says a Goldman executive involved in the sale. "We thought it was a good time to sell. Rarely do you unload that much at one time."
Indeed, Goldman netted approximately $700 million and held on to about $900 million worth of shares that are now worth between $500 million and $600 million as a result of the South Korean market's sharp decline. Even so, the firm has generated an estimated 40 percent internal rate of return in barely three years on its investment, with the potential for much more once the local market improves.
Although there was some local concern about the impact of the sale (Kookmin shares fell more than 4 percent locally when news of the ADR sale broke), Cornell is unapologetic. Goldman, he notes, first broached the idea of an investment with Kookmin management in the middle of 1998 -- a crisis environment very different from today's. "We thought our capital could help them through," Cornell explains. Last spring's share sale, he adds, opened a new capital market to Kookmin in the U.S. that it can access in the future. "We are here to help the bank," says Cornell, "but this is a pure investment."
While ING was also investing in an undervalued bank in the midst of the financial crisis, its relationship and objectives differ. The Dutch bank wanted to use the H&CB stake as a launching pad into South Korea's potentially huge and untapped bancassurance market. ING established ING Life Korea, an insurance affiliate, in 1991 and eventually plans to sell insurance products through a banking channel. The new Kookmin assumed a 20 percent stake H&CB held in ING Life Korea, which sells its insurance through local agents. Together Kookmin and ING are creating a joint venture within ING Life that could grow into another partnership devoted to bank insurance sales.
One problem: The government was supposed to permit bank sales of insurance last year, but financial regulators recently postponed approval until August 2003. Until then, ING and Kookmin are focusing on training and information technology readiness. "ING brings the insurance expertise, and Kookmin brings the distribution" via its 1,187 branches, says Donald MacKenzie, an ING executive who's overseeing an overhaul of Kookmin's risk management operation.
The second ING-Kookmin initiative is KB Investment Trust Management Co., a former division of H&CB that was renamed after the merger. This project, in which ING has a 20 percent interest, offers a variety of investment products to South Korean customers. KBITM now oversees $9.17 billion in assets, making it the fifth-largest Korean money manager. The company sells its products through banks, notably Kookmin, and securities firms.
In spite of the occasional setbacks, Goldman and ING have had a smoother ride in South Korea than have some of their foreign rivals. U.S. private equity firm Newbridge Capital, which acquired 51 percent of Korea First Bank in 1999, has ruffled government and banking feathers by refusing to roll over certain corporate loans and by forcing the government to live up to its agreement to absorb bad debts. That unhappiness may have affected the government's decision in August to reject a buyout offer for SeoulBank from Dallas-based Lone Star Fund, a specialist in distressed properties. Instead, the government gave the deal to local Hana Bank.
Commerzbank, which owns a minority stake in the government-controlled Korea Exchange Bank, has had its own headaches. Against the German bank's wishes, KEB went ahead with a controversial refinancing of Hynix Semiconductor earlier this year that has left the South Korean bank as a big equity investor in an extremely troubled company.
How have Goldman and ING managed to avoid such troubles? "ING has been investing in markets like Korea for 30 years," says MacKenzie. "Goldman is one of the best firms in the world. Our success was due in part to the openness of the relationship between the team in Korea and the investors, Goldman and ING." No doubt fortuitous timing helped as well. -- D.K.