Financial Holding Companies Take Cautious Steps in M&A Amid COVID-19

Slight Increase from Last Year but Safe Investment Suited to the Market
Strengthening Non-Bank Sector Performance... Fiercer Competition Expected Next Year

[Asia Economy Reporter Jo Gang-wook] The merger and acquisition (M&A) performance of major domestic financial holding companies this year fell short of initial targets. Although the CEOs of financial holding companies expressed their commitment to M&A in their New Year's addresses, the rapidly changing investment environment due to the COVID-19 pandemic dampened the M&A market. In particular, M&A results in overseas markets were lackluster. However, it has been proven that all financial holding companies managed to hold their ground by strengthening their non-bank sectors amid this year's management uncertainties, leading to expectations of fiercer M&A competition next year.

According to the financial sector on the 31st, the number of M&A deals and new subsidiaries established by major domestic financial groups such as KB, Shinhan, Hana, and Woori Financial this year totaled 11, an increase of 2 from 9 last year.

This increase was mainly due to KB Financial's M&A deals and new subsidiaries rising sharply from 1 last year to 7 this year. Conversely, Shinhan Financial's deals decreased from 4 last year to 1 this year, and Woori Financial's from 3 to 2 during the same period. Hana Financial remained the same with 1 deal both last year and this year.

In KB Financial's case, most of the deals completed this year were contracts that had been underway for several years rather than new M&A attempts, which is seen as "reaping what was sown."

For example, the acquisition of a 70% stake in Prasac Microfinance, Cambodia's largest deposit-taking microfinance institution (MDI), in April was based on a contract signed in December last year. The acquisition of an 80% stake in PT Finansia Multifinance, an Indonesian credit finance company, in June was also contracted in November last year. The acquisition of a total 67% stake in Indonesia's Bukopin Bank in August, securing management rights, had been ongoing since acquiring a 22% stake in July 2018.

The situation was similar for other financial holding companies. Rather than actively seeking deals, they took a somewhat cautious approach suited to market conditions. Neoplux, a venture capital firm incorporated as the 17th subsidiary by Shinhan Financial in September, was a company sold by Doosan Group amid liquidity crisis restructuring. The K Insurance, acquired by Hana Financial in February, was put up for sale by the Korea Teachers' Credit Union starting October last year due to deteriorating profitability. Woori Financial, which had initially shown interest in securities and insurance companies, completed the incorporation of Ajou Capital and Ajou Savings Bank, for which it secured preemptive purchase rights in 2017, as a subsidiary and a grandchild company respectively this month. Due to the unfavorable market conditions caused by COVID-19 and the recent performance of financial holding companies hinging on their non-bank portfolios, they accelerated acquisitions such as Ajou Capital despite a one-year extension of the preemptive purchase rights.

Despite adverse factors such as zero interest rates and COVID-19, financial holding companies delivered "surprise results" exceeding market expectations, which is analyzed to be due to their focus on strengthening the non-bank sector. Accordingly, M&A competition among financial holding companies is expected to intensify next year as well.

In fact, KB Financial acquired 100% of Prudential Life Insurance shares for about 2.22 trillion won in April, rapidly expanding its market share. As of last year, the combined net profit with KB Life ranked fifth in the industry. The effect was immediate. At the end of the third quarter, KB Financial posted a net profit of 1.1666 trillion won, an 18.8% improvement from the previous quarter. KB Financial plans to expand its M&A strategy next year with a two-track approach focusing on Southeast Asia and advanced countries such as the United States.

Shinhan Financial saw over 100% growth in profits from Shinhan Investment Corp. and Shinhan Life Insurance, and the acquisition effect of Orange Life, acquired last year, also began to significantly improve the group's profit structure. Shinhan Financial plans to continuously explore portfolios not yet held, such as capital markets and non-life insurance, as well as tech companies closely linked to the group's platform and global emerging markets. Hana Financial is reviewing non-bank M&A as a strategic priority, and Woori Financial plans to continue seeking M&A opportunities in securities firms.

A financial sector official said, "Financial holding companies have focused on strengthening their non-bank sectors in recent years," adding, "While detailed strategies may vary depending on market conditions, they are keeping the door open for active M&A possibilities based on firm principles such as enhancing shareholder value and portfolio diversification."

This content was produced with the assistance of AI translation services.