Survival at Stake for Banks

Banks focus on investment banking to brace for onrush of changes from Capital Market Consolidation act

With the Capital Market Consolidation Act expected to put into force next year, the financial industry is looking for new business models under the new law. The law already got general assembly approval after much political haggling on July 3.
The new law will make the dividing line between the banking, securities and insurance business sectors of the financial industry insecure and fuzzy by allowing the securities and insurance companies take interest-paying deposits from customers and in return banks will be allowed to engage in selling insurance products and securities to indicate some of the changes the new law will bring.
To take best advantage of the new law, the banks are out to focus on the investment banking as their core new growth engine, shifting away from mortgage loans, which they have been heavily dependent upon for revenue since 2000.
The IB businesses include project financing real estate, asset-based securities, investment in or take over of securities in overseas securities markets,
and handling mergers and acquisitions, among others. Goldman Sachs, Morgan Stanley and Merrill Lynch are some of the well-known IBs operating around the world.
Chairman Yoon Jeung-hyun of the Financial Supervisory Commission, announced recently in a meeting with heads of banks that the financial industry is being faced with the age of limitless competition and they would have tough time surviving if they don't change their operations within the walls of banks, insurance and securities sectors.
Woori Bank, in the meantime, upgraded its IB business team to the IB headquarters and expects the income from the new IB headquarters to reach 40 billion won for this year. They have already invested in the desalination project in Saudi Arabia, becoming the 23rd member of an international consortium.Shinhan Bank signed an agreement to arrange the syndication loan of
$180 million to finance the construction of a highway in Azerbaijan, while Kookmin Bank has arranged 35 cases of syndication loans totaling $4.761 billion last year. Korea Development Bank, for the first time, signed a consultation agreement with a titanium mine company in China to strengthen its IB operations in the neighboring country.
KDB has been at the forefront of the IB operations, but its officials agree that the bank needs to supplement its IB operations to compete with leading IB in the world. A KDB official said the bank needs capable professionals, loaded with knowledge and expertise,which is hard to find and the bank has yet to have a system to not only to pay them nor reward them for outstanding performances. The bank should also have enough capital to cover losses from the IB operations since its deals with real money and investments.Also, to be taken into account is the removal or revision of various financial regulations for
Korean banks to operate IB businesses. Foreign IB professionals note that Korea has too many complicated financial regulations for investment banking operations. Another problem is the bank does not have enough capital to absorb losses from the IB operations, which occur sometime dealing with real money in real projects around the world.As has been noted, the core of the new capital market law is designed to destroy the wall among financial businesses so that investment banks operate freely without being hindered by territories.Lee Jae-woo, head of the Samsung Securities IB support dep's, said when the new law is put into force,we expect many new business opportunities will emerge and many financial companies in the country have not been able to fully grasp what they will face when the law comes into effect. The financial infrastructure has got to be strong to be able to guarantee a rosy and future for the financial industry, he added.
Senior research staff Noh Jin-ho of Hana Financial Institute,
said the new capital market law will induce investment in riskier projects to secure the growth of the capital market and the expansion of IB investment would have banks and securities firms grow together. nw

Gov. Kim Chang-lok of Korea Development Bank

President Kang Kwon-seok of Industrial Bank of Korea (IBK)

President Kang Chung-won of Kookmin Bank

President Shin Sang-hoon of Shinhan Bank

President Park Hae-choon of Woori Bank