The appetite of foreign banks to buy into the Korean financial sector remains high. Especially the big international players are drawn to the country's stable environment, as well as its competitive and widely consolidated bank market. The majors, it seems, are ploughing ahead, largely undaunted by sluggish domestic demand which, combined with high oil prices, has dented Korea's economic potential in recent years.
Last month Standard Chartered Bank completed its acquisition of Korea First Bank, the country's seventh largest banking group. The UK bank, which paid the equivalent of $3.4 billion in cash for the purchase, hopes the deal will generate important business growth in Korea. "We are confident that this acquisition will be earnings accretive in 2006," says Mervyn Davies, Standard Chartered's group chief executive, in a statement.
Standard Chartered outbid rival HSBC for the deal last December. "There is great interest in South Korea, with Standard Chartered and Citigroup entering the market and HSBC looking to enter it too," says Russell Kop, head of Asia research at HSBC.
The latter announced its plans to bid for Korea Exchange Bank in November this year, and has since said that its aim is to grow its Korean business, which remains small, "organically". The bank recently issued a statement saying "this will mean a bricks and mortar investment to expand our physical presence, but also refers to product development," although it did not offer more information on its proposed bid.
The Korea First purchase comes on the heels of Citigroup's takeover of Koram bank, Korea's fifth largest lender, which took place last year. Standard Chartered, which also owns a 10% stake in Koram, had wanted to buy the bank but failed to win that deal.
But buying a stake in the growing domestic market is still mostly the domain of larger international banks who – in principle at least – have something new to offer the market. "This is a game for the big boys among Asian banking groups," says Klaus Felsinger, senior investment officer at the Asian Development Bank. "Margins have been razor thin for Korean banks, as competition has historically been on price."
New sophistication
But foreign banks are expected to inject a new level of know-how and offer more sophisticated investment services. "It's not going to kill [Korean Banks], but they will have to work harder," adds Felsinger.
Korea is a fairly mature market, with income levels comparable to the lower end of OECD countries. Growth rates may be much smaller than in China, the other country in the region being eyed by foreign banks, but they are considered more stable. "There is a reasonable, not amazing growth potential," says Felsinger.
Last year, Korea's economy grew by 4.6% and projections for this year are slightly higher. The government is pursuing a soft expansionary policy to boost the domestic market and to raise growth to the estimated potential of 5-6%. "The key issue is the recovery in private consumption, which has been negative for the last two and a half years," says Joseph Lau, economist at CSFB.
Korean consumers are only just recovering from a widespread credit card crisis, in which unregulated lending resulted in a sharp hike in household debt. One in seven of all issued cards defaulted, resulting in a slowdown in domestic demand. But analysts agree that a recovery should occur this year or next. "[Consumption] will slowly recover, maybe not as fast as it has in the past," says Takahira Ogawa, director of Asia Pacific sovereign ratings at Standard & Poor's, the ratings agency. Lau adds: "The domestic economy will pick up this year and next."
The high oil price is another dampening factor for the economy of the world's fifth largest net oil importer.
Major consolidation has already occurred in the financial sector. This situation makes it a more secure playing field for newcomers, who do not run the risk of becoming marginalized through large mergers. The open question is what the international banks are going to offer in order to succeed in the country.
"Coming into Korea now is a reasonably good time if you're aiming for retail," says Lau. Long-term investment, however, might be more of a problem, "because the good corporations don't need to go to the banks for financing; it's the weaker credits that have to borrow from banks."
Corporate gains
Ogawa sees chances on the corporate side. "In Korea it is almost impossible to get long-term financing. Most companies can only get one to three year funding." Individual borrowing, on the other hand, is only just recovering. "Consumer lending has increased again but expansion will be slow," he says.
Others think that it is their international expertise that will make the foreign players stand out. "Investment and savings products are very attractive, and there is room to introduce more sophisticated services," says Felsinger.
Foreign institutions, which lack the funds to build up more offices, will be looking to lure customers away from their rivals by offering better deals. Citibank's arrival last year was marked by deposits, which offered 4.5% annual return, compared to 3.6% given by competitors. "Ultimately, it will benefit the consumer," points out Felsinger. "They will get better services at a good price."