Description
The recent economic and political development of South Korea has been a remarkable success story. In 1987, the country emerged from four decades of authoritarian rule to hold multi-party elections and is now one of Asia’s most stable democracies.
Financial Services
Entering the South Korean
?nancial services market*
Entering the South Korean fnancial services market • PricewaterhouseCoopers 3
The recent economic and political development of South
Korea has been a remarkable success story. In 1987,
the country emerged from four decades of authoritarian
rule to hold multi-party elections and is now one of Asia’s
most stable democracies. The country has also bounced
back from the ?nancial crisis of 1997 to become one of
the world’s most developed and productive economies.
Although economic protectionism is still a potential issue,
there is a growing recognition within the country that
greater openness to foreign investment is essential if
South Korea is to compete with China and other rapidly
emerging economic rivals.
Investment interest from international ?nancial services
groups is increasing, re?ecting the economic potential
and strengthening balance sheets of South Korea’s
?nancial institutions (South Korea has no legal restrictions
on foreign ownership of ?nancial services companies).
Major acquisitions by Citibank in 2004 and Standard
Chartered in 2005 were followed in September 2007
by HSBC’s announcement of plans to buy a majority
stake in the Korea Exchange Bank (KEB).
1
If the takeover
goes ahead, it would be the most valuable deal involving
a foreign buyer in the South Korean ?nancial sector.
The relaxation of controls on cross-ownership of ?nancial
services businesses (‘Capital Market Consolidation Act’),
along with further privatisation of state-owned banking
interests and planned ?otation of a number of leading
life insurers, will open up further opportunities for entry,
acquisition and business development.
As leading international ?nancial services groups look
to develop their footprint in Asia, a presence in South Korea,
one of the continent’s most valuable markets, would appear
increasingly desirable, if not essential. This ?yer, produced
by PricewaterhouseCoopers,
2
looks at the openings for
entry and development at a time when the South Korean
?nancial services sector is reaching out for foreign investment
and discusses how international groups can realise these
opportunities.
Introduction
1 See P4 – footnotes 9, 10 and 11.
2 PricewaterhouseCoopers refers to the network of member ?rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
4 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Overview
South Korea has a highly developed and pro?table ?nancial •
services sector including the second largest insurance
market
3
and third largest banking
4
market in Asia.
The stability of the banking sector is underpinned by •
strong fundamentals and active regulation. At less than
1%,
5
South Korea’s non-performing loan ratio is low by
regional standards (Taiwan’s is 2.5%
6
and Thailand’s is
8%,
7
for example). The BIS capital ratios were an average
of 12.87% in June 2007.
4
South Korea is due to move to
Basel II regulation in 2008.
Foreign investors own some 70% of the banking •
sector.
8
Longer-term strategic investors have moved
into the market in recent years, in many cases acquiring
the stakes of an earlier wave of private equity buyers.
Recent entrants include Citibank
9
and Standard
Chartered.
10
This trend has continued with HSBC’s
announcement in September 2007 that it had agreed
to buy a 51% stake in KEB.
11
The asset management sector is set for rapid growth as a •
result of forthcoming pension reform. Foreign investment
in the sector is increasing rapidly through a combination
of acquisition, joint venture and green?eld developments.
More than a third of the country’s 52 asset managers are
now solely or jointly run by international groups.
12
Recent
foreign entrants include UBS,
13
ING
14
and Goldman Sachs.
15
Insurance remains dominated by a small number of local •
players. However, foreign companies are beginning to
make strong inroads, especially through Bancassurance
strategies. Foreign entry into the market has included
both acquisition of existing companies (e.g. Allianz Life’s
acquisition of Jeil Life
16
) and green?eld start-ups (e.g. ING
Life
17
). Planned sales and ?otation could open up new
investment targets.
The Capital Market Consolidation Act, which is due •
to come into force in 2009, seeks to break down the
barriers between ?nancial sectors. The Act will enhance
opportunities for cross-selling, including the marketing
of increasingly popular investment funds to the customer
bases of retail banks.
Although protectionism could be a potential hurdle for •
foreign acquirers, there are hopes that following the
elections in December 2007, deals will have become
less politically sensitive and may therefore be easier
to complete.
The Financial Supervisory Service has pledged to tackle •
foreign investors’ concerns about ‘regulatory transparency
and consistency’.
18
Measures include more straightforward
licensing procedures.
3 Swiss Re Sigma World Insurance Report 2006.
4 Financial Supervisory Service media release, 17.10.07.
5 Financial Supervisory Service media release, 31.8.07.
6 Taiwan Financial Supervisory Commission’s Banking Bureau, 31.12.06.
7 Bank of Thailand, 30.6.07.
8 Financial Times, 15.2.07.
9 Citigroup media release, 22.2.05.
10 Standard Chartered media release, 19.4.05.
11 HSBC media release, 3.9.07.
12 Korean Overseas Information Service of the Government Information Agency (www.korea.net), 5.8.07.
13 UBS media release, 11.5.07.
14 ING media release, 19.6.07.
15 Reuters, 7.5.07.
16 About Allianz in South Korea (www.allianz.com), 24.11.07.
17 ING Life Korea media release, 5.6.07.
18 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service to the European Union Chamber of Commerce in Korea, 17.10.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 5
Investment environment
South Korea is the third largest economy in Asia and 12
th
in the world (market exchange rate basis – MER).
19
Alongside
Hong Kong and Singapore, South Korea is one of the original
Asian ‘tigers’ to have moved from emerging to ‘high income’
developed economy.
20
Key export manufacturing sectors
include ship-building (world leader), car-making (Hyundai
Motors is the sixth largest vehicle manufacturer in the world)
and electronics (Samsung Electronics is the world’s leading
producer of memory chips).
Gross domestic product (GDP) expanded by 5% in 2006
and growth is expected to exceed 4% per annum until the
end of the decade (see Figure 1). Manufacturing for export is
the main engine of economic expansion (exports have
grown by 15% per annum since 2003
21
). In contrast, growth
in services and the domestic economy as a whole has been
sluggish in recent years. Consumer demand has in particular
been held back by high levels of credit card and other
household debt built up in the earlier part of the decade.
Figure 1 – Key facts
Population 49 million
GDP $888 billion (2006 MER)
$1,117 billion (2006 PPP)
GDP per capita $18,220 (2006 MER)
$22,928 (2006 PPP)
GDP growth 5% (2006)
4.5% (2007 estimate)
4.7% (2008 estimate)
4.2% (2009 estimate)
In?ation 3.2% (03/07)
Unemployment 3.3% (12/06)
Sources: National Statistical Of?ce, Economist Intelligence Unit, CIA World Factbook.
As South Korea seeks to respond to competition from
lower cost producers in China, Vietnam and other emerging
economies, the focus of manufacturing is shifting from mass
production to higher quality and added value. However, as a
major manufacturer with limited natural resources, the country
is vulnerable to the upturn in oil and other commodity prices,
along with any downturn in the US and other key export
markets. As an export-led economy with strong trading ties to
the US, South Korea’s prospects could also be affected by
the continuing weakness of the US Dollar.
Looking ahead, South Korea’s economic development will
bene?t from its excellent standards of education. It ranks third
in the world for human capital (as measured by education and
training attainment), only exceeded by the US and Canada.
19
However, the country’s ageing population could impede
growth. The number of people in the core working age group
(15–59) is set to decline by more than 20% by 2050, one of
the largest reductions in the developed world.
19
Financial services as driver of growth
The government sees the development of ?nancial services
(currently accounting for 7.5% of GDP
21
), as critical in
stimulating domestic growth. Key objectives include further
deregulation and attracting more foreign investment as part
of plans to turn the country into a ?nancial hub for East Asia.
The Capital Market Consolidation Act, which is due to come
into force in 2009, will mark an important step forward in
deregulation by breaking down the barriers between sectors.
The Act is comparable to the UK’s ‘Big Bang’ or the repeal
of the Glass-Steagall Act in the US. A key aim is to enable
larger securities companies to provide a broader and more
sophisticated range of capital market products and fee-
generating services. By eliminating rules on the separation
of banking, insurance and asset management operations,
the Act will also open the way for greater cross-selling
and cross-ownership within the ?nancial services sector.
22
This includes providing banks with a valuable opportunity
to develop their capital market, insurance and asset
management businesses through marketing to their
traditional customer base.
19 ‘The world in 2050’ (www.pwc.com).
20 The World Bank de?nes a ‘high income’ economy as having a Gross National Income (GNI) per capita of $11,116 or more. South Korea’s GNI per capita in 2006 was $17,690 (MER) – source www.
worldbank.org country classi?cation.
21 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the European Union Chamber of Commerce in Korea, 17.10.07.
22 Korea Times, 19.4.07.
6 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Investment environment
At the same time, the government and regulators recognise
the importance of strengthening governance, disclosure and
risk management in sustaining investment and growth. This
includes the move to Basel II capital standards, which are on
track to be introduced in 2008, and International Financial
Reporting Standards, which will be mandatory from 2011.
South Korea has no formal legal limitations on the ownership
of ?nancial institutions by foreign groups and in that sense
is one of the most open markets in Asia. However, some
sections of the population are wary of relinquishing control
to international groups. Sensitivities have been further
heightened by the high returns made by foreign private
equity buyers in the recent sale of stakes in banks and other
?nancial institutions, though these pro?ts could equally be
seen as a reasonable reward for the risks taken when these
holdings were originally acquired in the aftermath of the
?nancial crisis.
These political pressures have led to what some see as
an inconsistent or even protectionist regulatory approach
to foreign investors. The issue has been highlighted by
the high-pro?le investigations into US private equity ?rm
Lone Star’s takeover of KEB in 2003. Particular concerns
centre on whether the continuing legal wrangling might
hold up HSBC’s planned acquisition of KEB from Lone Star.
The Financial Supervisory Service (FSS) has indicated that
it will not consider the HSBC/KEB takeover until a court
ruling on the Lone Star/KEB deal.
23
Looking ahead, however, the outlook appears more
favourable. In a speech to the American Chamber of
Commerce in October 2007, Kim Yong-Duk, the new
Governor of the FSS, pledged to address concerns over
‘inadequate regulatory transparency, consistency and
predictability’ as part of the regulator’s commitment to
creating ‘a market environment friendly to foreign investors’.
24
This includes making it ‘easier for new entrants to get in’ and
‘giving equal treatment to domestic and foreign investors’.
As a sign of the FSS’ commitment to engaging with foreign
investors, it has recruited William Ryback, a former of?cial in
the Hong Kong and US central banks, as a senior advisor.
25
There are also hopes that the political sensitivity over
foreign acquisitions may now begin to recede following the
elections in December 2007 and that the HSBC and other
future deals will prove easier to complete. It is notable that
all the leading candidates, including the new President,
Lee Myung-Bak stressed the importance of attracting more
foreign investment.
It should also be noted that despite concerns over
perceived protectionism, foreign investment in the ?nancial
services sector has continued apace in 2007 (see Figure 2).
New entrants include UBS Global Asset Management,
which acquired a controlling stake in South Korea’s third
largest asset manager in May 2007.
26
Looking ahead, further bank privatisation and the planned
?otation of a number of leading life insurers are expected
to attract considerable attention from overseas. Interest is
coming both from large international groups and from within
the Asia-Paci?c region, including China.
23 Financial Times, 3.9.07 and 26.11.07.
24 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the American Chamber of Commerce on 5.10.07.
25 Financial Times, 31.8.07.
26 UBS media releases, 27.7.06 and 11.5.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 7
Figure 2 – Most valuable M&A deals in 2007
Sector Acquirer Target Stake Value Status
Banking HSBC Korea Exchange
Bank
51% $6.3 billion Pending (?nal
approval may
be subject to a
court ruling)
27
Insurance HSBC Hana Life
Insurance
49% $58.4 million Pending
28
Munich Re Daum Direct Undisclosed Undisclosed Reported talks
29
AXA Kyobo Auto 75% Undisclosed Agreed
30
Asset
Management
UBS Daehan ITMC 51% $162 million Agreed
31
ING Group Landmark
Investment
Management
100% Agreed
32
Goldman Sachs Macquarie
IMM Asset
Management
100% Agreed
33
Sources: See footnotes.
27 HSBC media release, 3.9.07.
28 HSBC media release, 12.11.07.
29 Bloomberg, 10.9.07.
30 AXA media release, 15.3.07.
31 UBS media release, 11.5.07.
32 ING media release, 19.6.07.
33 Reuters, 7.5.07.
8 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Market environment
A) Banking
The 1997 ?nancial crisis led to the closure, merger and
nationalisation of a number of banks, along with tougher
government rules on lending, transparency and capital
adequacy. A signi?cant proportion of the non-performing
loans were absorbed by KAMCO, a special purpose vehicle
set up by the government. The government’s decisive
intervention led to a swift stabilisation of the credit system.
Having reached 12.9% in the aftermath of the crisis,
the bad debt ratio of South Korean banks has fallen steadily
in recent years, both through disposal and improvements
in the ?nancial condition of corporations and individual
consumers. In June 2007, 0.78% of loans by value were
in arrears, a low proportion by international and certainly
by regional standards.
34
Today, the banking industry in South Korea is the third largest
in Asia with assets of $1,485 billion (June 2007).
35
Return on
assets in 2006 was 1.12%.
36
The BIS capital ratios were an
average of 12.87% at the end of the second quarter.
37
Returns have been especially strong at the top end of the
sector (see Figure 3 for a list of the country’s leading banks).
Market leader Kookmin Bank announced a 9% increase
in pro?ts to reach a record of US$2.6 billion in 2006.
38
The Shinhan Financial Group, owner of the country’s third
largest bank, recorded pro?ts of US$1.98 billion in 2006,
a 17% rise.
38
However, as much of this growth has centred on retail
mortgages and real estate lending, some leading banks
could be vulnerable to a prolonged downturn in an
already deteriorating property market. Mortgage lending
in the sector as a whole increased by 30% in 2006 to $29
billion,
39
though growth has since tailed off markedly
following government curbs on allowable debt to income
ratios aimed at stabilising rapidly rising house prices.
Although South Korea has relatively low rates of home
ownership in comparison to other developed countries,
a surge in speculative investment has led to something
of a property ‘bubble’ in some larger cities.
Figure 3 – Top ten commercial banks in South Korea
Rank Name Total
assets*
Operating
revenue**
1 Kookmin Bank 229,852 11,314
2 Woori Bank 196,866 9,845
3 Shinhan Bank 194,765 9,486
4 Hana Bank 135,341 5,144
5 Korea Exchange Bank 81,660 4,408
6 SC First Bank 62,484 5,073
7 Citibank Korea 56,444 3,903
8 Pusan Bank 27,149 918
9 Daegu Bank 24,955 1,001
10 Kyongnam Bank 20,174 661
Total 1,029,690 51,753
(Unit: USD million)
*As of 30 June 2007 **For the six months ended 30 June 2007
Banks in green are majority-owned by a single international group (most others have a high
proportion of foreign ownership, though over a diverse range of shareholders).
Source: Financial Statistics Information System.
Banks’ interest income went up by 5% to reach $32 billion
in 2006.
39
The most signi?cant growth market was lending
to SMEs, which rose by more than 400% in 2006 to reach
$47 billion.
39
The consumer credit segment (including credit
card and hire purchase borrowing) grew by nearly 40% in
2006 to $45 billion.
39
South Korean banks are not as heavily
exposed to US sub-prime losses as those in Europe.
However, the indirect impact of global credit market issues
may affect demand in 2008, especially as the country
already has signi?cant levels of household debt.
34 Financial Supervisory Service media release, 31.8.07.
35 Financial Supervisory Service statistics update, 17.10.07.
36 Financial Supervisory Service media release, 23.1.07.
37 Financial Supervisory Service media release, 17.10.07.
38 Financial Times, 15.2.07.
39 Korean Economic and Financial Review (April 2007).
Entering the South Korean fnancial services market • PricewaterhouseCoopers 9
Looking ahead, the Capital Market Consolidation Act could
open up new opportunities for cross-selling to bank customers,
including further development of Bancassurance and capital
market business. However, retail margins are coming under
increasing pressure in the wake of growing competition
and ever keener pricing. Other opportunities include further
development of corporate lending and services, a sizeable
proportion of which is currently conducted abroad.
Consolidation drivers
The top three banks are pulling ahead in a sector where
the development of competitive scale is seen as increasingly
important. Key developments include Shinhan Bank’s US$7.5
billion acquisition of the country’s leading credit card provider,
LG Card, in March 2007, which was the country’s largest
ever M&A deal.
40
Woori Bank and Hana Bank have in turn emerged as both
potential buyers and prime takeover targets as they and other
smaller institutions seek to remain credible as consolidation
takes hold. The government owns a majority stake (currently
73%) of Woori through the Korean Deposit Insurance
Corporation (KDIC) and has given the green light for a
phased sale of its shares. It is notable that half of the initial
public offering in Woori in June 2007 was placed overseas.
41
Other government holdings that may eventually come on to
the market include the shares its various agencies own in
the Industrial Bank of Korea.
Foreign investment
The recapitalisation that followed the ?nancial crisis in
1997 included signi?cant investment and acquisition by
foreign private equity buyers. Although opportunities for
private equity involvement remain, many of the original
buyers have sold on their stakes to longer term strategic
investors. In 2004, for example, Citibank bought KorAm
Bank (now part of Citibank Korea), a sizeable proportion of
whose shares were owned by a private equity consortium.
42
In 2005, Standard Chartered acquired a controlling stake
in the Korea First Bank (now SC First Bank) from private
equity ?rm Newbridge Capital.
43
In September 2007, HSBC announced that it had agreed
to buy a 51% stake in KEB, the country’s ?fth largest bank,
from US private equity ?rm Lone Star for $6.31 billion.
‘The prospective acquisition would provide HSBC with a
signi?cant presence in Asia’s third largest economy and
reinforce our position as Asia’s number one international
bank,’ said Group Chairman Stephen Green.
44
Entry and development options
1. Acquisition
As Citibank and Standard Chartered have shown, acquisition
offers a quick way to establish a top ten market presence.
Many local institutions are in turn keen to attract foreign
expertise and capital.
The HSBC bid for KEB equates to a multiple of 1.83 times
KEB’s stated book value in June 2007.
44
The price compares
favourably to comparable recent takeovers in similarly mature
markets – Standard Chartered paid 2.3 times net asset value
when it bought Taiwan’s Hsinchu International Bank, for
example.
45
However, takeover prices in South Korea may begin
to edge up as competition for scale and acquisition from local
players increases. Foreign buyers may also face signi?cant trade
union issues if seeking to restructure the acquired business.
2. Organic growth
Licensing arrangements for new entrants are being simpli?ed.
However, it can take some time to establish a signi?cant market
presence through green?eld development in South Korea and no
foreign bank has so far broken into the top ten through this route.
Barriers include curbs on the opening of new branches.
3. Joint venture
A number of international groups have developed joint
ventures with leading local banks, matching their expertise
with local distribution and customer relationship strengths.
Prominent examples include Macquarie Bank, which has
entered into partnerships with Shinhan Bank (asset management
and ?nancial advisory), Kookmin (treasury derivatives)
and Woori (equity derivatives).
46
Other joint ventures include
ING, which has developed a Bancassurance partnership
with Kookmin Bank through joint ownership of KB Life
and ING Life Korea.
47
40 International Herald Tribune, 16.8.06.
41 Reuters, 21.6.07.
42 Citigroup media release, 22.2.05.
43 Standard Chartered media release, 19.4.05.
44 HSBC media release, 3.9.07.
45 Standard Chartered media release, 28.9.06.
46 www.macquarie.com, update 25.10.07.
47 ING media release, 19.6.07.
10 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Market environment
B) Asset management
In April 2007, the value of assets under management in
South Korea was US$258 billion.
48
This already fast-growing
sector is set for rapid further expansion as a result of an
ageing population, high levels of savings and forthcoming
pension reform. Changes include a new compulsory corporate
pension scheme, which is due to cover all companies by 2010.
Under the scheme, the management of at least a proportion
of each company fund would need to be outsourced.
The scheme will ‘open up new growth opportunities
for ?nancial service providers’, said Chang-lok Kim,
Deputy Governor of the FSS, writing in the Korea Times.
49
Highlighting the potential for expansion, Mr Kim noted
that pension plan assets were less than 3% of GDP in
South Korea, compared to some 15% in Japan and more
than 50% in the US.
49
The Capital Market Consolidation
Act could also help to generate new custom by allowing
asset managers to widen the scope of investment.
These opportunities are attracting a surge of interest from
international groups. Foreign-controlled asset managers
currently hold some 20% of the market.
50
As the market
broadens and permissible investments become more
sophisticated, foreign marketing, product and investment
management expertise are likely to become more prized
by both customers and potential joint venture partners.
Recent investors include UBS,
51
which acquired Daehan
ITMC in a joint venture with Hana Bank (see Figure 4). ‘In light
of Korea’s strong underlying economic growth, continuing
reform of the pensions market and the increasing sophistication
of investors, we believe that the Korean asset management
market offers very signi?cant potential for growth, and will be
an increasingly attractive destination for foreign investment,’
said John Fraser, CEO of UBS Asset Management.
51
ING is augmenting its recently established ING Investment
Management Korea through its acquisition and integration
of Landmark Investment Management.
52
Those currently
opting for green?eld development include JP Morgan Chase,
which gained regulatory approval to set up operations under
the newly introduced licensing arrangements in 2007.
53
Figure 4 – Top fve asset managers in
South Korea by AUM (March 2007)
AUM
Mirae Asset Management US$22.44 billion
Samsung ITMC US$21.21billion
Daehan ITMC* US$20.45 billion
Woori AMC US$17.33 billion
Korea ITMC US$17.04 billion
*Now renamed UBS Hana Asset Management
Source: Asset Management Association of Korea ‘Major Accounts of B/S’ 31.3.07.
C) Insurance
South Korea is the second largest insurance market in
Asia, with premium income of US$101 billion in 2006.
54
Life insurance premiums per capita were US$1490 and
non-life premiums were US$591 in 2006.
54
At 11.1%,
the percentage of premiums to GDP is comparable to
France or Switzerland
54
(see Figure 5).
Figure 5 – Comparison of insurance premiums
Total as %
of GDP
Life
per capita
Non-life
per capita
South Korea 11.1% $1490 $591
Japan 10.5% $2829 $760
France 11% $2933 $1153
Switzerland 11% $3112 $2450
Source: Re Sigma World Insurance Report 2006.
48 Asset Management Association of Korea website, update 25.10.07.
49 Korea Times, 25.10.05.
50 Korea Times. 26.4.07/AFX News 6.7.07.
51 UBS media release, 11.5.07.
52 ING media release, 19.6.07.
53 Reuters, 11.5.07.
54 Swiss Re Sigma World Insurance Report 2006.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 11
Some local life insurers are under-capitalised by international
standards. The move to risk-based capital regulation could
encourage ?otation as companies seek to bolster their
capitalisation. A recent court ruling over who should bene?t
from the proceeds of sale or ?otation (the owners won out over
policyholders) has cleared the way for the initial public offering
(IPO) or sale of the country’s largest life insurers including
Samsung Life, Korea Life and Kyobo Life (see Figure 6).
Figure 6 – Top fve life insurers in South Korea
Name Total assets Premium income
Samsung Life 120,910 17,577
Korea Life 50,550 8,601
Kyobo Life 47,817 9,260
ING Life 11,657 3,287
Shinhan Life 7,206 2,303
Source: Financial Statistics Information System, as of 31 March 2007.
The insurance sector is highly concentrated. The top three
life insurers controlled more than 60% of the market and
the leading ?ve non-life insurers had a combined share of
more than 75% at the end of 2006.
55
Although foreign
investment in the insurance sector is low in comparison to
other developed markets (19% market share for life and
1.5% for non-life),
55
international groups are growing strongly
in areas such as Bancassurance and variable life insurance.
Leading foreign-owned insurers include ING Life Korea,
whose rapid recent expansion is a notable example of
organic growth. Established in 1984, ING Life’s premiums
have tripled since 2003 and the company passed the
million customer mark in May 2007.
56
International groups that have grown through acquisition
include Allianz Life, which took over the long-established
Jeil Life in 1999.
57
In March 2007, AXA acquired a 75%
stake in Kyobo Auto, the country’s leading direct motor
insurance provider.
58
In November 2007, HSBC announced
plans to buy a 49% stake in Hana Life as part of a joint
venture with the Hana Financial Group.
59
Hana Life bene?ts
from access to the Hana Financial Group’s seven million
customers. Forthcoming sales and IPOs could open up
fresh opportunities for market entry and development
through acquisition.
D) Securities
Strengthening economic con?dence and increased pension
fund investment in equities helped the Korean Composite
Stock Price Index (KOSPI) to rise above the 2000 mark for
the ?rst time in the summer of 2007.
60
Despite a subsequent
decline in line with global market trends, the KOSPI was
still some 40% up on the beginning of the year in December
2007
61
and has risen by more than 70% since 2005.
62
The surge in share values has generated a signi?cant
increase in business for securities ?rms. On the brokerage
side, further growth in volumes is expected as investors
switch from real estate to stocks amid tighter mortgage
controls. Foreign investment through local securities
?rms could also increase as a result of a planned
three-year suspension of capital gains tax on income
from overseas funds.
55
The Capital Market Consolidation Act could transform
the sector by allowing securities ?rms to set up
asset management, investment consulting and futures
and derivatives trading arms (previously income was
predominantly derived from brokerage fees). The Act
is intended to open the way for the development of
fully-?edged investment banks. However, the more
immediate result may be consolidation from within
and acquisition from outside the sector.
55 Korean Economic and Financial Review (April 2007).
56 ING Life Korea media release, 5.6.07.
57 About Allianz in South Korea, (www.allianz.com) 24.11.07.
58 AXA media release, 15.3.07.
59 HSBC media release, 12.11.07.
60 Financial Times, 26.7.07.
61 Financial Times, 18.12.07.
62 Korea Exchange website (www.krx.co.kr) 9.8.07.
12 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Good prospects
Could it be time for international ?nancial services
institutions to take a fresh look at South Korea? The economy
is growing far faster than most comparably developed markets.
Deregulation and increasing consumer sophistication are
opening up fresh opportunities for market development in
what is already a stable and highly pro?table sector.
Although regulatory attitudes have been inconsistent
at times, this is one of the few markets in Asia to allow
outright foreign control of ?nancial services companies.
A consensus around the need for even greater openness
to foreign investment is building within government.
In particular, there is a growing recognition that to sustain
its strong global position in the face of increasing regional
competition, South Korea needs a dynamic and well-
capitalised ?nancial sector. This in turn demands more
expertise and investment from abroad. Banking and
asset management are leading the way in foreign
investment. Insurance looks set to follow. ‘There is no
turning back on Korea’s ?nancial globalisation,’ said
Kim Yong-Duk, Governor of the FSS, in a speech to the
EU Chamber of Commerce in October 2007.
63
Ultimately, as ?nancial services groups seek to extend
their footprint across Asia, it would be pertinent to ask
whether an Asian expansion strategy can be credible if it
ignores one of the region’s genuine economic giants.
63 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the European Union Chamber of Commerce in Korea, 17.10.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 13
Contacts
Nick Page, Partner (Editor)
PricewaterhouseCoopers (UK)
1 Embankment Place,
London WC2 6RH, UK
44 (0) 20 7213 1442
[email protected]
Hong-Kee Kim, Partner
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 13th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 709 0554
[email protected]
Iwan Griffths, Partner (Author)
PricewaterhouseCoopers (UK) on secondment to Samil
PricewaterhouseCoopers (Korea)
Kukje Center Building 20th Floor,
191 Hangang-no 2ga, Yongsan-gu,
Seoul 140-702, Korea
82 2 709 0950
[email protected]
Cheong-Ryong Lee, Partner
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 12th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 709 0432
[email protected]
Edward Choi, Director
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 13th Floor,
631 Namdaemunno 5-ga,
Jung-gu, Seoul 100-803, Korea
82 2 3781 9546
[email protected]
Frank Morisano, Director
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 5th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 3781 1406
[email protected]
If you wish to discuss any of the issues raised in this paper in more detail, please speak with your usual contact at
PricewaterhouseCoopers or contact one of the following:
Subjects covered in the Financial Services
M&A ?yer series
Investment prospects in the Indonesian banking sector •
Entering the Indian ?nancial services market •
Banking in 2050: How big will emerging markets get? •
Entering the Gulf ?nancial services market •
Entering the ?nancial services market in Taiwan •
Entering the Chinese investment management industry •
Recent ?nancial services M&A
related publications
Financial Services M&A: Going for growth in Asia (2007) •
Financial Services M&A: Going for growth in Europe (2007) •
Going for growth: The outlook for mergers and •
acquisitions in the ?nancial services sector in Asia (2006)
Financial services M&A: Review and outlook for mergers and •
acquisitions in the European ?nancial services market (2006)
Nick Page is a partner in the PricewaterhouseCoopers (UK) Financial Services Transaction team, based in London. Hong-Kee
Kim, Iwan Grif?ths, Cheong-Ryong Lee, Edward Choi and Frank Morisano are members of the Samil PricewaterhouseCoopers
(Korea) Financial Services Transaction team, based in Seoul. Samil PricewaterhouseCoopers (Korea) has a team of 50
professionals dedicated to ?nancial services M&A, the largest practice in the country, supported by other advisory lines of
business including tax, risk management and performance improvement. The team has the experienced local knowledge to
help you maximise value from your deal, whether you are acquiring or selling a business. Services include due diligence
(?nancial, tax, operational, IT, human resource and legal), corporate ?nance, valuation and non-performing loans sale, as well
as advising on post-merger transition.
The member ?rms of the PricewaterhouseCoopers network provide industry-focused assurance, tax and advisory services to build public trust and
enhance value for clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and
solutions to develop fresh perspectives and practical advice.
This PricewaterhouseCoopers Financial Services M&A suite of collateral is produced by experts in their particular ?eld at PricewaterhouseCoopers,
to review important issues affecting the ?nancial services industry. This report has been prepared for general guidance on matters of interest only, and
is not intended to provide speci?c advice on any matter, nor is it intended to be comprehensive. No representation or warranty (express or implied) is
given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers
?rms do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any decision based on it. If speci?c advice is required, please speak with your usual
contact at PricewaterhouseCoopers or those listed in this publication.
For further information, please contact Áine Bryn, Marketing Director, Global Financial Services, PricewaterhouseCoopers (UK), London on
+44 (0)20 7212 8839 or at [email protected]
For additional copies, please contact Maya Bhatti at PricewaterhouseCoopers (UK), London on +44 (0)20 7213 2303 or at [email protected]
pwc.com
© 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member ?rms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
Designed by studioec4 18981 (02/08)
doc_856558401.pdf
The recent economic and political development of South Korea has been a remarkable success story. In 1987, the country emerged from four decades of authoritarian rule to hold multi-party elections and is now one of Asia’s most stable democracies.
Financial Services
Entering the South Korean
?nancial services market*
Entering the South Korean fnancial services market • PricewaterhouseCoopers 3
The recent economic and political development of South
Korea has been a remarkable success story. In 1987,
the country emerged from four decades of authoritarian
rule to hold multi-party elections and is now one of Asia’s
most stable democracies. The country has also bounced
back from the ?nancial crisis of 1997 to become one of
the world’s most developed and productive economies.
Although economic protectionism is still a potential issue,
there is a growing recognition within the country that
greater openness to foreign investment is essential if
South Korea is to compete with China and other rapidly
emerging economic rivals.
Investment interest from international ?nancial services
groups is increasing, re?ecting the economic potential
and strengthening balance sheets of South Korea’s
?nancial institutions (South Korea has no legal restrictions
on foreign ownership of ?nancial services companies).
Major acquisitions by Citibank in 2004 and Standard
Chartered in 2005 were followed in September 2007
by HSBC’s announcement of plans to buy a majority
stake in the Korea Exchange Bank (KEB).
1
If the takeover
goes ahead, it would be the most valuable deal involving
a foreign buyer in the South Korean ?nancial sector.
The relaxation of controls on cross-ownership of ?nancial
services businesses (‘Capital Market Consolidation Act’),
along with further privatisation of state-owned banking
interests and planned ?otation of a number of leading
life insurers, will open up further opportunities for entry,
acquisition and business development.
As leading international ?nancial services groups look
to develop their footprint in Asia, a presence in South Korea,
one of the continent’s most valuable markets, would appear
increasingly desirable, if not essential. This ?yer, produced
by PricewaterhouseCoopers,
2
looks at the openings for
entry and development at a time when the South Korean
?nancial services sector is reaching out for foreign investment
and discusses how international groups can realise these
opportunities.
Introduction
1 See P4 – footnotes 9, 10 and 11.
2 PricewaterhouseCoopers refers to the network of member ?rms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
4 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Overview
South Korea has a highly developed and pro?table ?nancial •
services sector including the second largest insurance
market
3
and third largest banking
4
market in Asia.
The stability of the banking sector is underpinned by •
strong fundamentals and active regulation. At less than
1%,
5
South Korea’s non-performing loan ratio is low by
regional standards (Taiwan’s is 2.5%
6
and Thailand’s is
8%,
7
for example). The BIS capital ratios were an average
of 12.87% in June 2007.
4
South Korea is due to move to
Basel II regulation in 2008.
Foreign investors own some 70% of the banking •
sector.
8
Longer-term strategic investors have moved
into the market in recent years, in many cases acquiring
the stakes of an earlier wave of private equity buyers.
Recent entrants include Citibank
9
and Standard
Chartered.
10
This trend has continued with HSBC’s
announcement in September 2007 that it had agreed
to buy a 51% stake in KEB.
11
The asset management sector is set for rapid growth as a •
result of forthcoming pension reform. Foreign investment
in the sector is increasing rapidly through a combination
of acquisition, joint venture and green?eld developments.
More than a third of the country’s 52 asset managers are
now solely or jointly run by international groups.
12
Recent
foreign entrants include UBS,
13
ING
14
and Goldman Sachs.
15
Insurance remains dominated by a small number of local •
players. However, foreign companies are beginning to
make strong inroads, especially through Bancassurance
strategies. Foreign entry into the market has included
both acquisition of existing companies (e.g. Allianz Life’s
acquisition of Jeil Life
16
) and green?eld start-ups (e.g. ING
Life
17
). Planned sales and ?otation could open up new
investment targets.
The Capital Market Consolidation Act, which is due •
to come into force in 2009, seeks to break down the
barriers between ?nancial sectors. The Act will enhance
opportunities for cross-selling, including the marketing
of increasingly popular investment funds to the customer
bases of retail banks.
Although protectionism could be a potential hurdle for •
foreign acquirers, there are hopes that following the
elections in December 2007, deals will have become
less politically sensitive and may therefore be easier
to complete.
The Financial Supervisory Service has pledged to tackle •
foreign investors’ concerns about ‘regulatory transparency
and consistency’.
18
Measures include more straightforward
licensing procedures.
3 Swiss Re Sigma World Insurance Report 2006.
4 Financial Supervisory Service media release, 17.10.07.
5 Financial Supervisory Service media release, 31.8.07.
6 Taiwan Financial Supervisory Commission’s Banking Bureau, 31.12.06.
7 Bank of Thailand, 30.6.07.
8 Financial Times, 15.2.07.
9 Citigroup media release, 22.2.05.
10 Standard Chartered media release, 19.4.05.
11 HSBC media release, 3.9.07.
12 Korean Overseas Information Service of the Government Information Agency (www.korea.net), 5.8.07.
13 UBS media release, 11.5.07.
14 ING media release, 19.6.07.
15 Reuters, 7.5.07.
16 About Allianz in South Korea (www.allianz.com), 24.11.07.
17 ING Life Korea media release, 5.6.07.
18 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service to the European Union Chamber of Commerce in Korea, 17.10.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 5
Investment environment
South Korea is the third largest economy in Asia and 12
th
in the world (market exchange rate basis – MER).
19
Alongside
Hong Kong and Singapore, South Korea is one of the original
Asian ‘tigers’ to have moved from emerging to ‘high income’
developed economy.
20
Key export manufacturing sectors
include ship-building (world leader), car-making (Hyundai
Motors is the sixth largest vehicle manufacturer in the world)
and electronics (Samsung Electronics is the world’s leading
producer of memory chips).
Gross domestic product (GDP) expanded by 5% in 2006
and growth is expected to exceed 4% per annum until the
end of the decade (see Figure 1). Manufacturing for export is
the main engine of economic expansion (exports have
grown by 15% per annum since 2003
21
). In contrast, growth
in services and the domestic economy as a whole has been
sluggish in recent years. Consumer demand has in particular
been held back by high levels of credit card and other
household debt built up in the earlier part of the decade.
Figure 1 – Key facts
Population 49 million
GDP $888 billion (2006 MER)
$1,117 billion (2006 PPP)
GDP per capita $18,220 (2006 MER)
$22,928 (2006 PPP)
GDP growth 5% (2006)
4.5% (2007 estimate)
4.7% (2008 estimate)
4.2% (2009 estimate)
In?ation 3.2% (03/07)
Unemployment 3.3% (12/06)
Sources: National Statistical Of?ce, Economist Intelligence Unit, CIA World Factbook.
As South Korea seeks to respond to competition from
lower cost producers in China, Vietnam and other emerging
economies, the focus of manufacturing is shifting from mass
production to higher quality and added value. However, as a
major manufacturer with limited natural resources, the country
is vulnerable to the upturn in oil and other commodity prices,
along with any downturn in the US and other key export
markets. As an export-led economy with strong trading ties to
the US, South Korea’s prospects could also be affected by
the continuing weakness of the US Dollar.
Looking ahead, South Korea’s economic development will
bene?t from its excellent standards of education. It ranks third
in the world for human capital (as measured by education and
training attainment), only exceeded by the US and Canada.
19
However, the country’s ageing population could impede
growth. The number of people in the core working age group
(15–59) is set to decline by more than 20% by 2050, one of
the largest reductions in the developed world.
19
Financial services as driver of growth
The government sees the development of ?nancial services
(currently accounting for 7.5% of GDP
21
), as critical in
stimulating domestic growth. Key objectives include further
deregulation and attracting more foreign investment as part
of plans to turn the country into a ?nancial hub for East Asia.
The Capital Market Consolidation Act, which is due to come
into force in 2009, will mark an important step forward in
deregulation by breaking down the barriers between sectors.
The Act is comparable to the UK’s ‘Big Bang’ or the repeal
of the Glass-Steagall Act in the US. A key aim is to enable
larger securities companies to provide a broader and more
sophisticated range of capital market products and fee-
generating services. By eliminating rules on the separation
of banking, insurance and asset management operations,
the Act will also open the way for greater cross-selling
and cross-ownership within the ?nancial services sector.
22
This includes providing banks with a valuable opportunity
to develop their capital market, insurance and asset
management businesses through marketing to their
traditional customer base.
19 ‘The world in 2050’ (www.pwc.com).
20 The World Bank de?nes a ‘high income’ economy as having a Gross National Income (GNI) per capita of $11,116 or more. South Korea’s GNI per capita in 2006 was $17,690 (MER) – source www.
worldbank.org country classi?cation.
21 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the European Union Chamber of Commerce in Korea, 17.10.07.
22 Korea Times, 19.4.07.
6 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Investment environment
At the same time, the government and regulators recognise
the importance of strengthening governance, disclosure and
risk management in sustaining investment and growth. This
includes the move to Basel II capital standards, which are on
track to be introduced in 2008, and International Financial
Reporting Standards, which will be mandatory from 2011.
South Korea has no formal legal limitations on the ownership
of ?nancial institutions by foreign groups and in that sense
is one of the most open markets in Asia. However, some
sections of the population are wary of relinquishing control
to international groups. Sensitivities have been further
heightened by the high returns made by foreign private
equity buyers in the recent sale of stakes in banks and other
?nancial institutions, though these pro?ts could equally be
seen as a reasonable reward for the risks taken when these
holdings were originally acquired in the aftermath of the
?nancial crisis.
These political pressures have led to what some see as
an inconsistent or even protectionist regulatory approach
to foreign investors. The issue has been highlighted by
the high-pro?le investigations into US private equity ?rm
Lone Star’s takeover of KEB in 2003. Particular concerns
centre on whether the continuing legal wrangling might
hold up HSBC’s planned acquisition of KEB from Lone Star.
The Financial Supervisory Service (FSS) has indicated that
it will not consider the HSBC/KEB takeover until a court
ruling on the Lone Star/KEB deal.
23
Looking ahead, however, the outlook appears more
favourable. In a speech to the American Chamber of
Commerce in October 2007, Kim Yong-Duk, the new
Governor of the FSS, pledged to address concerns over
‘inadequate regulatory transparency, consistency and
predictability’ as part of the regulator’s commitment to
creating ‘a market environment friendly to foreign investors’.
24
This includes making it ‘easier for new entrants to get in’ and
‘giving equal treatment to domestic and foreign investors’.
As a sign of the FSS’ commitment to engaging with foreign
investors, it has recruited William Ryback, a former of?cial in
the Hong Kong and US central banks, as a senior advisor.
25
There are also hopes that the political sensitivity over
foreign acquisitions may now begin to recede following the
elections in December 2007 and that the HSBC and other
future deals will prove easier to complete. It is notable that
all the leading candidates, including the new President,
Lee Myung-Bak stressed the importance of attracting more
foreign investment.
It should also be noted that despite concerns over
perceived protectionism, foreign investment in the ?nancial
services sector has continued apace in 2007 (see Figure 2).
New entrants include UBS Global Asset Management,
which acquired a controlling stake in South Korea’s third
largest asset manager in May 2007.
26
Looking ahead, further bank privatisation and the planned
?otation of a number of leading life insurers are expected
to attract considerable attention from overseas. Interest is
coming both from large international groups and from within
the Asia-Paci?c region, including China.
23 Financial Times, 3.9.07 and 26.11.07.
24 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the American Chamber of Commerce on 5.10.07.
25 Financial Times, 31.8.07.
26 UBS media releases, 27.7.06 and 11.5.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 7
Figure 2 – Most valuable M&A deals in 2007
Sector Acquirer Target Stake Value Status
Banking HSBC Korea Exchange
Bank
51% $6.3 billion Pending (?nal
approval may
be subject to a
court ruling)
27
Insurance HSBC Hana Life
Insurance
49% $58.4 million Pending
28
Munich Re Daum Direct Undisclosed Undisclosed Reported talks
29
AXA Kyobo Auto 75% Undisclosed Agreed
30
Asset
Management
UBS Daehan ITMC 51% $162 million Agreed
31
ING Group Landmark
Investment
Management
100% Agreed
32
Goldman Sachs Macquarie
IMM Asset
Management
100% Agreed
33
Sources: See footnotes.
27 HSBC media release, 3.9.07.
28 HSBC media release, 12.11.07.
29 Bloomberg, 10.9.07.
30 AXA media release, 15.3.07.
31 UBS media release, 11.5.07.
32 ING media release, 19.6.07.
33 Reuters, 7.5.07.
8 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Market environment
A) Banking
The 1997 ?nancial crisis led to the closure, merger and
nationalisation of a number of banks, along with tougher
government rules on lending, transparency and capital
adequacy. A signi?cant proportion of the non-performing
loans were absorbed by KAMCO, a special purpose vehicle
set up by the government. The government’s decisive
intervention led to a swift stabilisation of the credit system.
Having reached 12.9% in the aftermath of the crisis,
the bad debt ratio of South Korean banks has fallen steadily
in recent years, both through disposal and improvements
in the ?nancial condition of corporations and individual
consumers. In June 2007, 0.78% of loans by value were
in arrears, a low proportion by international and certainly
by regional standards.
34
Today, the banking industry in South Korea is the third largest
in Asia with assets of $1,485 billion (June 2007).
35
Return on
assets in 2006 was 1.12%.
36
The BIS capital ratios were an
average of 12.87% at the end of the second quarter.
37
Returns have been especially strong at the top end of the
sector (see Figure 3 for a list of the country’s leading banks).
Market leader Kookmin Bank announced a 9% increase
in pro?ts to reach a record of US$2.6 billion in 2006.
38
The Shinhan Financial Group, owner of the country’s third
largest bank, recorded pro?ts of US$1.98 billion in 2006,
a 17% rise.
38
However, as much of this growth has centred on retail
mortgages and real estate lending, some leading banks
could be vulnerable to a prolonged downturn in an
already deteriorating property market. Mortgage lending
in the sector as a whole increased by 30% in 2006 to $29
billion,
39
though growth has since tailed off markedly
following government curbs on allowable debt to income
ratios aimed at stabilising rapidly rising house prices.
Although South Korea has relatively low rates of home
ownership in comparison to other developed countries,
a surge in speculative investment has led to something
of a property ‘bubble’ in some larger cities.
Figure 3 – Top ten commercial banks in South Korea
Rank Name Total
assets*
Operating
revenue**
1 Kookmin Bank 229,852 11,314
2 Woori Bank 196,866 9,845
3 Shinhan Bank 194,765 9,486
4 Hana Bank 135,341 5,144
5 Korea Exchange Bank 81,660 4,408
6 SC First Bank 62,484 5,073
7 Citibank Korea 56,444 3,903
8 Pusan Bank 27,149 918
9 Daegu Bank 24,955 1,001
10 Kyongnam Bank 20,174 661
Total 1,029,690 51,753
(Unit: USD million)
*As of 30 June 2007 **For the six months ended 30 June 2007
Banks in green are majority-owned by a single international group (most others have a high
proportion of foreign ownership, though over a diverse range of shareholders).
Source: Financial Statistics Information System.
Banks’ interest income went up by 5% to reach $32 billion
in 2006.
39
The most signi?cant growth market was lending
to SMEs, which rose by more than 400% in 2006 to reach
$47 billion.
39
The consumer credit segment (including credit
card and hire purchase borrowing) grew by nearly 40% in
2006 to $45 billion.
39
South Korean banks are not as heavily
exposed to US sub-prime losses as those in Europe.
However, the indirect impact of global credit market issues
may affect demand in 2008, especially as the country
already has signi?cant levels of household debt.
34 Financial Supervisory Service media release, 31.8.07.
35 Financial Supervisory Service statistics update, 17.10.07.
36 Financial Supervisory Service media release, 23.1.07.
37 Financial Supervisory Service media release, 17.10.07.
38 Financial Times, 15.2.07.
39 Korean Economic and Financial Review (April 2007).
Entering the South Korean fnancial services market • PricewaterhouseCoopers 9
Looking ahead, the Capital Market Consolidation Act could
open up new opportunities for cross-selling to bank customers,
including further development of Bancassurance and capital
market business. However, retail margins are coming under
increasing pressure in the wake of growing competition
and ever keener pricing. Other opportunities include further
development of corporate lending and services, a sizeable
proportion of which is currently conducted abroad.
Consolidation drivers
The top three banks are pulling ahead in a sector where
the development of competitive scale is seen as increasingly
important. Key developments include Shinhan Bank’s US$7.5
billion acquisition of the country’s leading credit card provider,
LG Card, in March 2007, which was the country’s largest
ever M&A deal.
40
Woori Bank and Hana Bank have in turn emerged as both
potential buyers and prime takeover targets as they and other
smaller institutions seek to remain credible as consolidation
takes hold. The government owns a majority stake (currently
73%) of Woori through the Korean Deposit Insurance
Corporation (KDIC) and has given the green light for a
phased sale of its shares. It is notable that half of the initial
public offering in Woori in June 2007 was placed overseas.
41
Other government holdings that may eventually come on to
the market include the shares its various agencies own in
the Industrial Bank of Korea.
Foreign investment
The recapitalisation that followed the ?nancial crisis in
1997 included signi?cant investment and acquisition by
foreign private equity buyers. Although opportunities for
private equity involvement remain, many of the original
buyers have sold on their stakes to longer term strategic
investors. In 2004, for example, Citibank bought KorAm
Bank (now part of Citibank Korea), a sizeable proportion of
whose shares were owned by a private equity consortium.
42
In 2005, Standard Chartered acquired a controlling stake
in the Korea First Bank (now SC First Bank) from private
equity ?rm Newbridge Capital.
43
In September 2007, HSBC announced that it had agreed
to buy a 51% stake in KEB, the country’s ?fth largest bank,
from US private equity ?rm Lone Star for $6.31 billion.
‘The prospective acquisition would provide HSBC with a
signi?cant presence in Asia’s third largest economy and
reinforce our position as Asia’s number one international
bank,’ said Group Chairman Stephen Green.
44
Entry and development options
1. Acquisition
As Citibank and Standard Chartered have shown, acquisition
offers a quick way to establish a top ten market presence.
Many local institutions are in turn keen to attract foreign
expertise and capital.
The HSBC bid for KEB equates to a multiple of 1.83 times
KEB’s stated book value in June 2007.
44
The price compares
favourably to comparable recent takeovers in similarly mature
markets – Standard Chartered paid 2.3 times net asset value
when it bought Taiwan’s Hsinchu International Bank, for
example.
45
However, takeover prices in South Korea may begin
to edge up as competition for scale and acquisition from local
players increases. Foreign buyers may also face signi?cant trade
union issues if seeking to restructure the acquired business.
2. Organic growth
Licensing arrangements for new entrants are being simpli?ed.
However, it can take some time to establish a signi?cant market
presence through green?eld development in South Korea and no
foreign bank has so far broken into the top ten through this route.
Barriers include curbs on the opening of new branches.
3. Joint venture
A number of international groups have developed joint
ventures with leading local banks, matching their expertise
with local distribution and customer relationship strengths.
Prominent examples include Macquarie Bank, which has
entered into partnerships with Shinhan Bank (asset management
and ?nancial advisory), Kookmin (treasury derivatives)
and Woori (equity derivatives).
46
Other joint ventures include
ING, which has developed a Bancassurance partnership
with Kookmin Bank through joint ownership of KB Life
and ING Life Korea.
47
40 International Herald Tribune, 16.8.06.
41 Reuters, 21.6.07.
42 Citigroup media release, 22.2.05.
43 Standard Chartered media release, 19.4.05.
44 HSBC media release, 3.9.07.
45 Standard Chartered media release, 28.9.06.
46 www.macquarie.com, update 25.10.07.
47 ING media release, 19.6.07.
10 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Market environment
B) Asset management
In April 2007, the value of assets under management in
South Korea was US$258 billion.
48
This already fast-growing
sector is set for rapid further expansion as a result of an
ageing population, high levels of savings and forthcoming
pension reform. Changes include a new compulsory corporate
pension scheme, which is due to cover all companies by 2010.
Under the scheme, the management of at least a proportion
of each company fund would need to be outsourced.
The scheme will ‘open up new growth opportunities
for ?nancial service providers’, said Chang-lok Kim,
Deputy Governor of the FSS, writing in the Korea Times.
49
Highlighting the potential for expansion, Mr Kim noted
that pension plan assets were less than 3% of GDP in
South Korea, compared to some 15% in Japan and more
than 50% in the US.
49
The Capital Market Consolidation
Act could also help to generate new custom by allowing
asset managers to widen the scope of investment.
These opportunities are attracting a surge of interest from
international groups. Foreign-controlled asset managers
currently hold some 20% of the market.
50
As the market
broadens and permissible investments become more
sophisticated, foreign marketing, product and investment
management expertise are likely to become more prized
by both customers and potential joint venture partners.
Recent investors include UBS,
51
which acquired Daehan
ITMC in a joint venture with Hana Bank (see Figure 4). ‘In light
of Korea’s strong underlying economic growth, continuing
reform of the pensions market and the increasing sophistication
of investors, we believe that the Korean asset management
market offers very signi?cant potential for growth, and will be
an increasingly attractive destination for foreign investment,’
said John Fraser, CEO of UBS Asset Management.
51
ING is augmenting its recently established ING Investment
Management Korea through its acquisition and integration
of Landmark Investment Management.
52
Those currently
opting for green?eld development include JP Morgan Chase,
which gained regulatory approval to set up operations under
the newly introduced licensing arrangements in 2007.
53
Figure 4 – Top fve asset managers in
South Korea by AUM (March 2007)
AUM
Mirae Asset Management US$22.44 billion
Samsung ITMC US$21.21billion
Daehan ITMC* US$20.45 billion
Woori AMC US$17.33 billion
Korea ITMC US$17.04 billion
*Now renamed UBS Hana Asset Management
Source: Asset Management Association of Korea ‘Major Accounts of B/S’ 31.3.07.
C) Insurance
South Korea is the second largest insurance market in
Asia, with premium income of US$101 billion in 2006.
54
Life insurance premiums per capita were US$1490 and
non-life premiums were US$591 in 2006.
54
At 11.1%,
the percentage of premiums to GDP is comparable to
France or Switzerland
54
(see Figure 5).
Figure 5 – Comparison of insurance premiums
Total as %
of GDP
Life
per capita
Non-life
per capita
South Korea 11.1% $1490 $591
Japan 10.5% $2829 $760
France 11% $2933 $1153
Switzerland 11% $3112 $2450
Source: Re Sigma World Insurance Report 2006.
48 Asset Management Association of Korea website, update 25.10.07.
49 Korea Times, 25.10.05.
50 Korea Times. 26.4.07/AFX News 6.7.07.
51 UBS media release, 11.5.07.
52 ING media release, 19.6.07.
53 Reuters, 11.5.07.
54 Swiss Re Sigma World Insurance Report 2006.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 11
Some local life insurers are under-capitalised by international
standards. The move to risk-based capital regulation could
encourage ?otation as companies seek to bolster their
capitalisation. A recent court ruling over who should bene?t
from the proceeds of sale or ?otation (the owners won out over
policyholders) has cleared the way for the initial public offering
(IPO) or sale of the country’s largest life insurers including
Samsung Life, Korea Life and Kyobo Life (see Figure 6).
Figure 6 – Top fve life insurers in South Korea
Name Total assets Premium income
Samsung Life 120,910 17,577
Korea Life 50,550 8,601
Kyobo Life 47,817 9,260
ING Life 11,657 3,287
Shinhan Life 7,206 2,303
Source: Financial Statistics Information System, as of 31 March 2007.
The insurance sector is highly concentrated. The top three
life insurers controlled more than 60% of the market and
the leading ?ve non-life insurers had a combined share of
more than 75% at the end of 2006.
55
Although foreign
investment in the insurance sector is low in comparison to
other developed markets (19% market share for life and
1.5% for non-life),
55
international groups are growing strongly
in areas such as Bancassurance and variable life insurance.
Leading foreign-owned insurers include ING Life Korea,
whose rapid recent expansion is a notable example of
organic growth. Established in 1984, ING Life’s premiums
have tripled since 2003 and the company passed the
million customer mark in May 2007.
56
International groups that have grown through acquisition
include Allianz Life, which took over the long-established
Jeil Life in 1999.
57
In March 2007, AXA acquired a 75%
stake in Kyobo Auto, the country’s leading direct motor
insurance provider.
58
In November 2007, HSBC announced
plans to buy a 49% stake in Hana Life as part of a joint
venture with the Hana Financial Group.
59
Hana Life bene?ts
from access to the Hana Financial Group’s seven million
customers. Forthcoming sales and IPOs could open up
fresh opportunities for market entry and development
through acquisition.
D) Securities
Strengthening economic con?dence and increased pension
fund investment in equities helped the Korean Composite
Stock Price Index (KOSPI) to rise above the 2000 mark for
the ?rst time in the summer of 2007.
60
Despite a subsequent
decline in line with global market trends, the KOSPI was
still some 40% up on the beginning of the year in December
2007
61
and has risen by more than 70% since 2005.
62
The surge in share values has generated a signi?cant
increase in business for securities ?rms. On the brokerage
side, further growth in volumes is expected as investors
switch from real estate to stocks amid tighter mortgage
controls. Foreign investment through local securities
?rms could also increase as a result of a planned
three-year suspension of capital gains tax on income
from overseas funds.
55
The Capital Market Consolidation Act could transform
the sector by allowing securities ?rms to set up
asset management, investment consulting and futures
and derivatives trading arms (previously income was
predominantly derived from brokerage fees). The Act
is intended to open the way for the development of
fully-?edged investment banks. However, the more
immediate result may be consolidation from within
and acquisition from outside the sector.
55 Korean Economic and Financial Review (April 2007).
56 ING Life Korea media release, 5.6.07.
57 About Allianz in South Korea, (www.allianz.com) 24.11.07.
58 AXA media release, 15.3.07.
59 HSBC media release, 12.11.07.
60 Financial Times, 26.7.07.
61 Financial Times, 18.12.07.
62 Korea Exchange website (www.krx.co.kr) 9.8.07.
12 Entering the South Korean fnancial services market • PricewaterhouseCoopers
Good prospects
Could it be time for international ?nancial services
institutions to take a fresh look at South Korea? The economy
is growing far faster than most comparably developed markets.
Deregulation and increasing consumer sophistication are
opening up fresh opportunities for market development in
what is already a stable and highly pro?table sector.
Although regulatory attitudes have been inconsistent
at times, this is one of the few markets in Asia to allow
outright foreign control of ?nancial services companies.
A consensus around the need for even greater openness
to foreign investment is building within government.
In particular, there is a growing recognition that to sustain
its strong global position in the face of increasing regional
competition, South Korea needs a dynamic and well-
capitalised ?nancial sector. This in turn demands more
expertise and investment from abroad. Banking and
asset management are leading the way in foreign
investment. Insurance looks set to follow. ‘There is no
turning back on Korea’s ?nancial globalisation,’ said
Kim Yong-Duk, Governor of the FSS, in a speech to the
EU Chamber of Commerce in October 2007.
63
Ultimately, as ?nancial services groups seek to extend
their footprint across Asia, it would be pertinent to ask
whether an Asian expansion strategy can be credible if it
ignores one of the region’s genuine economic giants.
63 Address by Kim Yong-Duk, Governor of the Financial Supervisory Service, to the European Union Chamber of Commerce in Korea, 17.10.07.
Entering the South Korean fnancial services market • PricewaterhouseCoopers 13
Contacts
Nick Page, Partner (Editor)
PricewaterhouseCoopers (UK)
1 Embankment Place,
London WC2 6RH, UK
44 (0) 20 7213 1442
[email protected]
Hong-Kee Kim, Partner
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 13th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 709 0554
[email protected]
Iwan Griffths, Partner (Author)
PricewaterhouseCoopers (UK) on secondment to Samil
PricewaterhouseCoopers (Korea)
Kukje Center Building 20th Floor,
191 Hangang-no 2ga, Yongsan-gu,
Seoul 140-702, Korea
82 2 709 0950
[email protected]
Cheong-Ryong Lee, Partner
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 12th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 709 0432
[email protected]
Edward Choi, Director
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 13th Floor,
631 Namdaemunno 5-ga,
Jung-gu, Seoul 100-803, Korea
82 2 3781 9546
[email protected]
Frank Morisano, Director
Samil PricewaterhouseCoopers (Korea)
STX Namsan Tower 5th Floor,
631 Namdaemunno 5-ga, Jung-gu,
Seoul 100-803, Korea
82 2 3781 1406
[email protected]
If you wish to discuss any of the issues raised in this paper in more detail, please speak with your usual contact at
PricewaterhouseCoopers or contact one of the following:
Subjects covered in the Financial Services
M&A ?yer series
Investment prospects in the Indonesian banking sector •
Entering the Indian ?nancial services market •
Banking in 2050: How big will emerging markets get? •
Entering the Gulf ?nancial services market •
Entering the ?nancial services market in Taiwan •
Entering the Chinese investment management industry •
Recent ?nancial services M&A
related publications
Financial Services M&A: Going for growth in Asia (2007) •
Financial Services M&A: Going for growth in Europe (2007) •
Going for growth: The outlook for mergers and •
acquisitions in the ?nancial services sector in Asia (2006)
Financial services M&A: Review and outlook for mergers and •
acquisitions in the European ?nancial services market (2006)
Nick Page is a partner in the PricewaterhouseCoopers (UK) Financial Services Transaction team, based in London. Hong-Kee
Kim, Iwan Grif?ths, Cheong-Ryong Lee, Edward Choi and Frank Morisano are members of the Samil PricewaterhouseCoopers
(Korea) Financial Services Transaction team, based in Seoul. Samil PricewaterhouseCoopers (Korea) has a team of 50
professionals dedicated to ?nancial services M&A, the largest practice in the country, supported by other advisory lines of
business including tax, risk management and performance improvement. The team has the experienced local knowledge to
help you maximise value from your deal, whether you are acquiring or selling a business. Services include due diligence
(?nancial, tax, operational, IT, human resource and legal), corporate ?nance, valuation and non-performing loans sale, as well
as advising on post-merger transition.
The member ?rms of the PricewaterhouseCoopers network provide industry-focused assurance, tax and advisory services to build public trust and
enhance value for clients and their stakeholders. More than 146,000 people in 150 countries across our network share their thinking, experience and
solutions to develop fresh perspectives and practical advice.
This PricewaterhouseCoopers Financial Services M&A suite of collateral is produced by experts in their particular ?eld at PricewaterhouseCoopers,
to review important issues affecting the ?nancial services industry. This report has been prepared for general guidance on matters of interest only, and
is not intended to provide speci?c advice on any matter, nor is it intended to be comprehensive. No representation or warranty (express or implied) is
given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers
?rms do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in
reliance on the information contained in this publication or for any decision based on it. If speci?c advice is required, please speak with your usual
contact at PricewaterhouseCoopers or those listed in this publication.
For further information, please contact Áine Bryn, Marketing Director, Global Financial Services, PricewaterhouseCoopers (UK), London on
+44 (0)20 7212 8839 or at [email protected]
For additional copies, please contact Maya Bhatti at PricewaterhouseCoopers (UK), London on +44 (0)20 7213 2303 or at [email protected]
pwc.com
© 2008 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member ?rms of PricewaterhouseCoopers
International Limited, each of which is a separate and independent legal entity.
Designed by studioec4 18981 (02/08)
doc_856558401.pdf