Financial Holding Companies' 'Cautious' M&A Moves This Year "Strengthening Non-Banking Sectors Next Year" (Comprehensive)

[Asia Economy Reporter Jo Gang-wook] The merger and acquisition (M&A) performance of major domestic financial holding companies this year fell short of their 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 in performance this year by strengthening their non-bank sectors amid 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 deals also dropped from 3 to 2 during the same period. Hana Financial maintained 1 deal both last year and this year.

However, even in KB Financial's case, most of this year's completed deals were contracts that had been ongoing since previous 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. Similarly, the acquisition of an 80% stake in Indonesia's specialized credit finance company PT Finansia Multifinance in June was based on a contract signed in November last year. The acquisition of a total 67% stake in Indonesia's Bank Bukopin in August, securing management control, had been progressing 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 moderate approach suited to market conditions. For instance, Shinhan Financial's venture capital firm Neoplux, incorporated as its 17th subsidiary after acquisition in September, was a company sold by the 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 subsidiaries and sub-subsidiaries this month. The market conditions were unfavorable due to COVID-19, and especially as the recent performance of financial holding companies depended on their non-bank portfolios, they accelerated acquisitions like Ajou Capital despite a one-year extension of the preemptive purchase rights validity period.

Despite adverse factors such as zero interest rates and COVID-19, financial holding companies delivered "surprise performances" exceeding market expectations, which is analyzed to be due to the effectiveness of strengthening their non-bank sectors, their main focus so far. 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. While there was a gain from bargain purchase (profit arising when the acquisition price is lower than the value of the acquired company), part of the operating profit was also reflected. Consequently, the non-bank net profit ratio, which was 30.8% at the end of last year, increased to 40.3%.

KB Financial plans to expand next year with a two-track strategy focusing on the rapidly growing Southeast Asian market and advanced markets such as the U.S., where investment stability is high and domestic customers have a strong preference for overseas investments. In particular, having recently entered digital banking, auto finance, MFI, and securities businesses in Cambodia, Myanmar, Vietnam, and Indonesia, KB Financial has accumulated understanding and experience in the Southeast Asian market and is pursuing a strategy to concentrate on a few hubs and target countries to establish a second Mother Market.

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 appear in earnest, driving the group's profit structure improvement. Shinhan Financial plans to selectively expand its portfolio in the future. It has set plans to continuously explore portfolios not yet owned, such as capital markets and non-life insurance, as well as tech companies closely linked to the group's platforms and global emerging markets.

Hana Financial stated that rather than M&A based solely on economies of scale, it will consider non-bank M&A as a strategic priority if the target company can contribute to the group's sustainable and long-term growth, strengthen the business portfolio, create synergy, and enhance shareholder, customer, and corporate value. It will review M&A under these principles not only in the insurance business sector but across all business areas of the group, and plans to pursue inorganic growth at the group level through non-bank M&A considering the expansion potential of global and digital sectors.

Woori Financial plans to continue seeking M&A opportunities in securities and other areas to complete its comprehensive financial group business portfolio lineup and secure mid- to long-term growth engines in the new year. However, for the time being, it intends to focus on managing and nurturing the companies it has incorporated as affiliates to dramatically enhance their competitiveness and strive to create synergy with banks and other affiliates, aiming for internal strengthening.

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 possibility of active M&A open based on firm principles such as enhancing shareholder value and portfolio diversification."

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