[Viewpoint] The specter of a ‘megabank’So we are in the midst of another attempt to sell off Woori Financial Group. This important asset, currently held by the taxpayers, has been a millstone around the government’s neck for some time. This is the third try in as many years, but also likely the last chance they will get. But is it really a good idea?
Currently, Woori stock trades at a price-to-book ratio (PBR) of 0.57, and a price-earnings ratio (PER) of around 5. By the standards of any non-troubled bank, this is very low. The overall Korean banking sector is depressed according to these measures, but Woori stands out as bottom of the class. This is not to say that Woori is a bad bet, at all: Though created as a “bad bank” originally, it is today a solidly-run, profitable operation.
It is a cliche to say that the first rule of investment is “[To] buy low, and sell high.” But exiting Woori now would definitely be a case of selling low. A buyer of Woori would be getting a very sweet deal (from the taxpayers) indeed.
The trouble is though, that post-2008, nobody can really afford it, either Korean or foreign. The list of banks with the balance sheet and nerve to take on Woori must be truly tiny, post-2008.
An additional complication exists in that selling Woori to a foreign bank - or worse, some sly private equity outfit - is politically problematic. Clearly, a Korean partner is the most desirable from that perspective. It would also allow for the creation of a so-called “megabank,” the current holy grail of bank-related policy in Korea.
Proponents of the megabank state that such a deal would boost the competitiveness of the financial sector. Indeed, Korean banks are relatively uncompetitive when compared to the kind of firms for which Korea is more famous. But does it logically follow that adding one uncompetitive, medium-sized institution to another will result in, say, a Korean equivalent of HSBC?
Korea’s most competitive firms achieved their competitiveness internally. Samsung Electronics has overtaken its rivals not because it was bigger than them. Rather, it has overtaken them because it was more competitive in the first place. And as a result, it has become a bigger company than Sony, RIM, Nokia and so on. For Korean banks to genuinely improve, they first need to improve from within.
Despite investment bankers’ siren calls to the contrary, evidence suggests the so-called synergy benefits of big mergers to be limited. By contrast, the power of organic growth is indisputable. Recently, it has emerged that Korean banks’ foreign earnings have been powering ahead. Then why not simply allow them to grow organically, by continuing to improve their international operations?
It is also often pointed out that Korea has not one single bank in the world’s top 50, by asset size. But is this really such a bad thing? Despite not having the support of a megabank with worldwide clout, large Korean firms doing deals overseas seem to do just fine. And when one looks at the size of Korea’s existing big four banks in relation to the size of the national economy, can one really say that they are not big enough?
In the first half of 2011, KB had total assets of $254 billion. This is roughly 22 percent of the size of Korea’s GDP. If Woori’s $231 billion were added via a megabank merger, the combined entity would have assets of almost 42 percent of the GDP.
Of course, KB-Woori would still be dwarfed by Citigroup or Bank of America. But these latter two - poster children for “too big to fail” - only had assets of 12.7 and 13.6 percent of the U.S. GDP, respectively, in 2008.
Of course, I am not saying that KB or Woori has shown the kind of irresponsibility, which Citi or B of A habitually displayed. Their core businesses are plain, relatively easy to understand and conservative - exactly the way banks should be, in my opinion.
But the consequences of potential irresponsibility are so great that we should not even allow the possibility of too-big-to-fail trouble to arise. And you can be sure that if worse came to the worst, you - the reader of this article - would be the one paying for it, just as my family and friends in the U.K. are paying for zombie giants like the Royal Bank of Scotland.
* The author is the Seoul correspondent for The Economist.
by Daniel Tudor
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