South Korea’s digital lenders challenge the country’s traditional giants
SEOUL – When Kakao Bank opened its digital doors in 2017, few expected South Korea’s leading online lender to stand alongside the country’s traditional financial giants in just four years.
But the subsidiary of the country’s second largest internet company, Kakao, filed an initial public offering with the financial regulator on June 28, seeking to raise up to 2.6 trillion won ($ 2.3 billion) on the stock market. Kospi benchmark in August.
If the listing goes as expected, Kakao Bank’s market capitalization could reach 18.6 trillion won, making it third in the banking sector, after heavyweights KB Financial Group, which includes Kookmin Bank, at 21.6 trillion won and Shinhan. Financial Group, of which Shinhan Bank is its core, with 20.3 trillion won.
Moreover, Kakao Bank is growing faster than its competitors and it is probably only a matter of time before the internet lender overtakes them. It said in March that it had deposits of 25.4 trillion won and loaned 21.6 trillion won, marking a compound annual growth rate, or CAGR, of 67.1% and 63.8%, respectively, far surpassing national lenders who saw increases of 9% and 8% over the same period.
Kakao Bank plans to use the funds raised during its IPO to invest 350 billion won in hiring, improving customer service, advancing credit scoring models, expanding banking infrastructure. customer protection, research and development “as well as the acquisition of financial technology companies,” she said in a statement. release after filing the IPO registration. “In the medium and long term, we plan to reach the global market through joint ventures and other measures.
Analysts say the country’s traditional banks face increasing competition as Kakao ventures into several credit segments.
“Kakao Bank’s assets have grown rapidly in unsecured personal loans attracting the highest number of users among [South] Korea’s mobile banking apps through seamless digital banking experience, ”Ok Tae-jong, vice president and senior analyst at Moody’s Investors Service, said in a report last week. “It has lower costs than most local counterpart banks in 2020, using technological advancements and operating without physical branches.”
Ok said incumbents are at a disadvantage compared to big tech companies because they lack platforms to attract customers and collect data from non-financial services. They also incur higher costs for maintaining physical branches, he said.
SK Securities also said that Kakao Bank enjoys low human resource and agency management costs compared to its traditional competitors. Kakao hired 952 employees in March with assets per employee reaching 30.1 billion won, more than the average of the four major lenders of 27.1 billion won.
“Kakao Bank could reduce human resource costs compared to other commercial lenders by investing them in commercial infrastructure instead,” said Koo Kyung-hoe, analyst at SK Securities.
South Korea has been known for years for its tech-savvy population, which clearly benefits Kakao Bank. Moody’s said its mobile app had more than 10 million monthly active users as of November last year, or 21% of the country’s population over the age of 15.
In addition, the coronavirus pandemic has caused older people to adopt digital banking more than before and to demand such services from traditional banks. Kakao Bank said that people aged 50 and over have increasingly signed up over the past year and account for 30% of new customers.
The emergence of Kakao Bank comes as South Korea’s overall banking sector has consolidated over the past decade. Hana Bank merged with Korea Exchange Bank in 2015, after its parent company Hana Financial Group acquired a 51% stake in KEB from Lone Star Funds for 3.9 trillion won in 2012.
Foreign lenders are also withdrawing from the market due to stiff competition with local institutions. Citibank is in talks with South Korean banks to sell its consumer banking unit in the country after the US giant announced in April a plan to focus on its key markets.
Traditional lenders say they understand that strong platforms are essential to survive in the face of digital competition.
“We know that we cannot survive if we are left behind in the competition for a platform,” said a spokesperson for Kookmin Bank, adding that it is working on various changes and will continue to do so. “It’s not a one-time event.”
He said Kookmin has changed its organizational structure to respond more quickly to market demand by putting bankers and technicians on the same team. The bank is also diversifying and improving its mobile offerings by launching a comprehensive application and simplifying an existing application for simple payments.
But analysts say the shift from traditional banks to platform-based services, while ultimately delivering savings over time, is likely to require significant investment with smooth shipping far from guaranteed.
“The incumbent’s strategies to strengthen their platforms could involve additional costs and higher operational risks,” Ok said at Moody’s. “The more fundamental adjustment risks are potential changes in the pricing and underwriting strategies of these banks’ existing loans, which could subject the quality of their assets, profitability and capital to greater uncertainty.”
Local lenders also cover the risks by investing in their biggest online rival. Kookmin Bank owns an 8.02% stake in Kakao Bank, making it the third largest shareholder. Internet company Kakao, which owns the popular messaging app KakaoTalk, is the No.1 shareholder with 27.26%, followed by Korea Investment Value Asset Management, which owns 23.25%.
Kakao Bank, while the largest, isn’t the only digital lender in town. Another is the K Bank, run by the telecommunications company KT. In September, a third Toss digital bank will launch services targeting customers it sees as overlooked by traditional lenders such as students, housewives, small business owners and non-Koreans.
But there are challenges to overcome. Analysts say digital banks need to prove to investors that they are sustainable and profitable. K Bank, for example, recorded an operating loss of 105.4 billion won last year, compared to 100.8 billion won in red ink in 2019.
“The key question to maintain its value above the IPO price is whether Kakao Bank can establish its own business model by expanding its platform business and creating synergistic effects in the ecosystem. of Kakao, ”said Jun Bae-seung, analyst at eBest Securities.
“In addition, developing its own credit scoring model and improving risk management skills will be Kakao Bank’s next tasks as the lender expands its lending business to mid-level clients,” said Jun.
Kakao Bank is betting it can successfully ride the country’s IPO wave this year, but the risks have surfaced, highlighted by game developer Krafton. It slashed its IPO price by more than 10% earlier this month as South Korea’s financial regulator raised questions about its valuation and demanded a price overhaul, casting a shadow over the boom .
Kakao Pay, an online easy payment affiliate of Kakao, will also go public next month, with a goal of raising up to 1.6 trillion won. Kakao Pay is scheduled to debut on Kospi on August 12, just a week after Kakao Bank.
Analysts say Kakao’s aggressive IPO strategy is undermining shareholder value. Kakao registered Kakao Games last year and plans to register Kakao Entertainment next year.
“We have to stress its prejudice to existing shareholders and the market,” said Paul Choi, head of Korea research at CLSA. “Existing shareholders of the parent company are left with a holding company cashed in at an increasing discount and little reason to own it now that the better parts of its business can be owned directly.”
Such a view, however, is not about Kakao.
“We are not worried about the value of Kakao’s business after listing some of our communities,” CEO Yeo Min-soo said on the company’s earnings conference call in May, citing the continued growth expected revenue and operating profit led by KakaoTalk. “We will add future companies in various industries to our portfolio and continuously find new engines of growth.”