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SCMP Reporter

South Korean banks and debt-laden firms dread the move by foreign banks such as HSBC Holdings into the nation's banking industry, fearing their market share will be eroded and credit lines severed.

 Their concerns are misplaced. The arrival of foreign banks in a traditionally closeted environment is good news to both domestic and foreign banks alike because it will bring quality and growth to the sector, according to analysts.

 Companies also stand to benefit in the long run from the more efficient allocation of financial resources by foreign banks, they say.

 Following a year of efforts to reform the country's banks, foreign participation in the industry has swelled from nearly nothing.

 Last month, a consortium led by Newbridge Capital of the US beat HSBC in buying a 51 per cent stake in state-run Korea First Bank, becoming the first foreign entity to own a majority interest in a South Korean bank.

 HSBC was reported last week to be in talks with the Korean Government to buy state-owned Seoulbank.

  Last year, Commerzbank of Germany bought a 30 per cent stake in Korea Exchange Bank, one of Korea's top eight banks, for US$250 million. International Finance Corp, a unit of the World Bank, also invested $52 million in Hana Bank by acquiring its shares and convertible bonds.

 Hanvit Bank - recently created in a merger between Hanil Bank and Commercial Bank - is also trying to attract up to $500 million of foreign capital to improve its balance sheet.

 Housing Bank of Korea, one of the country's most profitable banks, is owned nearly 50 per cent by foreign investors and Kookmin Bank, another profitable bank, about 25 per cent.

 Nearly a third of all outstanding shares in Korea's top 10 commercial banks will soon be owned by foreign investors, compared with less than 10 per cent a year ago, after the government pressed the banks to improve their weak capital bases.

 Analysts said foreign banks, with their advanced banking techniques and efficient management, would easily outperform domestic banks.

 'Initially, the impact of foreign banks' advancement into Korea will be great,' Kookmin Bank Research Institute analyst Kim Jang-hee said. 'Their efficiency and productivity is much higher than the Korean banks.'  How foreign management in Korean banks will formulate their business strategies is still unclear, but analysts say their main priority will be to boost productivity, unlike local banks in the past which sought blindly to increase assets and business volumes.

 In doing so, foreign banks will revolutionise lending and other banking practices in Korea which have long been based on relationships, he said.

 'Foreign banks will be more rational and even cold-blooded in lending money,' he said. 'They will call back loans to even the oldest customers if they deem their businesses shaky.'  Analysts said companies whose debts were more than twice their equities could be the first ones to suffer a cut in credit lines from foreign-owned banks. Many top conglomerates, or chaebol , have debts more than four times their equities.

  'Foreign banks will pursue active demarketing at the beginning to eliminate bad borrowers,' Korea Institute of Finance researcher Jie Dong-hyun said.

 For that reason, some key clients of Korea First Bank and SeoulBank are uncomfortable with the banks' sales to foreign investors, as this could lead to reduced, if not suspended, credit lines.

 Such Western banking style has proved to be successful in Korea.

 Citibank, with only about a dozen branches in Korea, outstrips many giant Korean banks with a network of more than 300 branches each, in terms of profits. The US bank has been successful particularly in high-end retail banking focusing on affluent individuals, notably private banking.

 Foreign banks can also outperform local banks in raising funds. With their high credit ratings, leading foreign banks can raise money much more cheaply than local banks.

 But domestic banks will eventually benefit from the arrival of foreign banks as the latter strengthen and promote Korea's banking sector with new services and innovative products.

 'The pie of the banking industry can grow as foreign banks vitalise it,' Mr Jie said.



Foreigners on fringe of Korean welcome