South Korea: one of the best markets in the world for M&As right now

There is broad consensus that Korea is in a period of transition from the old, export-led growth model to a new model based on creativity and innovation. How is the finance and investment sector responding to, or, indeed, shaping this transition?

The Korean economy has shown resilient growth in the past. However, the economy has now reached the maturing stage. One unit of production now requires more capital, due to the slowing down of productivity per capita investment. The supply of labor is decreasing, because of the aging population and the low birth rate. We have sufficient capital, which has been accumulated over the last four to five decades, but the measurable contribution of the capital injection is slowing down. The key is to improve the productivity in the labor market as a whole.

The financial sector must contribute to enhancing this productivity. That’s the new role of the financial sector, as well as other knowledge-based service industries. We are no longer depending on the injection of capital or supply of cheap labor.

The efficiency, or the productivity, of the financial sector itself must be increased. We are now moving towards the consolidation of the financial system. As you have seen, KB group recently acquired another securities company to produce a more efficient level of productivity.

The second thing we must do is focus on new, innovative industries. In the past we were quite successful globally in sectors such as shipbuilding and petrochemicals. However, these days our competitiveness is being eroded and we are seeking new engines of growth. For example, biotechnology and fintech (financial technology) are two sectors with a lot of potential for Korea. The finance sector must support, or create, the environment for such new industries to flourish. We must invest in fintech platforms and foster the venture capital market so that individuals and groups can gain access to information about growing industries which are usually hidden to the population.

In addition, we must change the conservative financial culture where we always focus on the guaranteed quick return rather than the greater potential in the future. These are the three pillars for fostering new creative industries.

What is your assessment of the current investment climate in South Korea? Where do you see the most potential to generate profits from the investment banking side of your business?

There are three challenges that our financial industry is facing. The first one is Korea’s economic model being heavily skewed and dependent on exports, which makes it very difficult for us to adjust to the global recession, especially the slowdown in China.

The next would be the structural issues, which are the demographic and labor market problems we already mentioned.

The third is the industrial structure. Many of the conglomerates in Korea are still dependent and focused on the brick-and-mortar manufacturing model. This is capital intensive and very much dependent on exports. Its composition is still rooted in the ‘old economy’.

The government is fully aware of these challenges and that is good news. They are pushing to fast-track changes and relax regulations in order to meet financial challenges with the swiftest efficiency.

By addressing these challenges we can also enhance the attractiveness of Korea for foreign direct investment because, if we do not address these problems, the national growth prospects would be very slim. We have one of the world’s strongest R&D infrastructures in Korea, which can buttress problems in our heavy industries. Due to the investments that have been committed into artificial intelligence, fintech, and IoT, we have the potential to be the “first movers” and pioneers in these fields.

In addition, because the market is aware that we have to change from the old model to the new, and because changes are taking place so fast, Korea is perhaps the number one or the number two market in the world right now for M&As. Last year there were approximately 20 transactions exceeding a billion dollars. That provides huge opportunities for investment bankers around the world. That is the bright side of our economy, and the bright side of our business.

I must also talk about the infamous Korean “culture”. Although in geography we are part of north Asia, composed of China, Japan, and Korea, our cultural reach extends beyond our region, touching all Asian consumers with our drama, film, music and fashion.

This non-tangible content market has received so much attention and that in itself is expected to contribute to robust growth. The image of Korea exported through our cultural content creates a “wow” effect for foreign investors who begin looking again at old industries. For example, our cosmetics industry is hundreds of years old, but the “Korean Wave” has boosted this industry considerably.

When Chinese consumers watch Korean TV dramas, this creates a demand for the fashion, the music and even the foods that appear on screen. We now have Chinese tourists coming here to shop and eat chicken and drink beer because they want the things they saw on TV. In turn, Chinese investors in particular are looking for opportunities in these areas.

Currently, a bill to revise the Capital Market Act to turn the state-run Korea Exchange (KRX) into a holding company is pending at the National Assembly. What is KB I&S’s position on the plans to transform KRX into a holding company and the impact this could have here on the market?

Of course, as a member of KRX we fully support the transformation, but it will take time because of the new parliament.

We need to raise our regional competitiveness in the stock market because we are already way behind. Our competitors are moving towards a global exchange marketplace. Certainly we have to change and integrate with other regional exchanges. We probably need to integrate with mainland China, if they are willing.

KB Financial Group recently won its bid to buy a controlling stake in Hyundai Securities at 1.3 trillion won ($1.15bn). What will be the impact on KB I&S of this acquisition in terms of your competitiveness and services?

Our group is currently mostly focused on the banking sector, but we have a long-term strategy to expand into non-banking areas, especially the capital market industry. The acquisition of Hyundai Securities company was part of that effort.

Consumers’ needs are becoming more diverse every day. To fill the gap, the banking side needs some specialized support from the capital industry. We need to become a broad-based, fully equipped company to fill such gaps.

By acquiring Hyundai Securities, we can enhance the risk management capacity of our whole group.

Do you see scope for further M&As following the Hyundai Securities acquisition, perhaps with financial institutions in emerging markets elsewhere in the region?

Certainly, as an industry we need to expand overseas. But the reality is our group is well behind in this.

Our group chairman is focusing on becoming a well-structured, well-prepared player for international integration. The reality is we believe we need some time.

At the moment, the group strategy is focusing on the banking sector and targeting the Southeast Asian countries, because naturally we feel more comfortable operating in Asia than Europe or the Americas.

Even in Southeast Asia, we have a lot of Korean competitors. Shinhan is a leading Korean banking group and we are watching what they are doing overseas. We will observe and improve what we can to make our expansion successful.

The next area would be financial investment securities. With a longer mandate, I can achieve these goals.

KB I&S enjoyed a successful year in 2015, with total income before expenses up 28% from 2014; and a positive performance in the key investment banking and wealth management segments. What have you identified as KB I&S’s key targets and priorities in order to maintain this positive trajectory in 2016, going into 2017?

The main priority is the successful integration of Hyundai Securities once the acquisition is complete.

Within the next six months, the holding company will begin to administer the merger of two physical companies: Hyundai Securities and KB Investment & Securities. That’s a long process. We will find new challenges and new opportunities. We can’t quite say immediately what is our post-merger agenda because our first priority has to be ensuring harmony between these two families.

While that is happening it is KB’s objective, as the acquiring side, to maintain or to augment a very well-balanced portfolio of income, so that we don’t have a very weak business arm. We have to make sure that we are strong enough to merge into a different family.

When we have a merger of such entities, we have to determine what character we want to change into. Will we be focusing on growth in size, will we be focusing on profitability, or will we be focusing on sustainability? We must have a balanced growth model because if we suddenly decide to chase size, it may be profitable initially but it could be difficult to sustain results.

Our secondary priority is pretty much specific to all industry players, and that is the fact that we have to pursue higher return on equity (ROE). Even if we have a valiant portfolio of performance, if we’re not profitable then we have a big problem.

Sustainability and balance are important for us, but the overarching target is profitability.

How will the acquisition of Hyundai Securities impact your work with SMEs, as we understand you will automatically lose your status as a designated SME broker when the deal is officially completed?

We have six to seven months before we lose that status. Even after we lose that status, the deals we have made will survive as those contracts cannot be negated.

The authorities should be more flexible and wise with their regulations. We can provide a broader based service to SMEs than ever before, so why should we lose our status as a specialized SME broker just because we have grown in size? I don’t understand it.

As soon as the financial regulations were eased in January to allow retail investors to invest in start-ups via securities-based crowdfunding, KB launched the match fund in which KB Investment & Securities offers the same-size funding as the crowdfunding goal. Can you please expand on the role that KB I&S intends to play in promoting fintech and crowdfunding for start-ups and venture businesses going forward?

We have a group-wide strategy for fintech. Our holding company has a so-called fintech hub center, which was established last year. The fintech hub center is searching for potential fintech innovators. After they have reviewed the viability of their technology, they send the innovators to us to provide other financial services. They also select potentially viable fintech stock and ask for us to invest some capital.

It’s like a starters value program in Silicon Valley where you have many venture capitalists supporting the innovators by giving them office space and financial support. Since KB Financial Group has so many branches in financial support, we can advise them in their own wealth management, or startup strategies. Our brokerage arm can prepare them for an IPO. If they have their own staff, their earnings and profits would be managed by our wealth management program, and we can provide them with life insurance, and so on.

All in all, KB creates an environment whereby, when we foster a startup company, it becomes like a family member in the KB Group, which makes all the transactions much more efficient. By matching investment, we have a stake in their company as well.

You have enjoyed a successful career in the public service and since taking over the helm at KB I&S you have overseen a sharp upturn in profits, particularly in terms of investment banking. You spoke earlier about wanting to stay in this position for the next 10 years. How would you sum up your personal vision and ambitions for KB I&S going forward?

Personally, I want to contribute to the growth of our financial sector. That’s my personal ambition and desire. As you know, the financial market is very competitive. The first priority is to survive. Unfortunately, in Korea, the term of a CEO is usually very short, and it is getting shorter and shorter.

CEOs are seen as being expendable in Korea and this can hamper the development of a long-term vision. For obvious reasons, if the CEO’s term is short, he will focus on short-term results. My major concern is the disposability of CEOs, which inhibits their capacity to do their job to the best of their abilities. In Europe, it is normal for a CEO to serve for 15 years. I envy them. In Korea, even in politics, the people in the top positions are removed with regularity.

2016 has been a rewarding year. As of the first half, we made pre-tax profit of KRW43.2bn ($38.3m), recording 82% of our annual target. Very few competitors are recording all-round earnings. I look forward to being part of KB Investment & Securities and its grand growth into the leader of its industry.