Regulations Tighten and Acquisition Prices Soar... The Disappearance of Big Deals in Financial Holding Company Mergers and Acquisitions (Comprehensive)

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[Asia Economy reporters Park Sun-mi, Sung Ki-ho, Song Seung-seop] Financial holding companies, which have expanded their size through aggressive domestic and international mergers and acquisitions (M&A), have encountered temporary M&A limitations due to changes in the global economic environment caused by the spread of COVID-19 and domestic financial authorities' encouragement of capital expansion. Although diversification through non-bank M&A is urgently needed to counter the offensive of internet banks and big tech (large information and communication companies) that are actively expanding their areas by breaking down the boundaries of the financial industry, progress has been slow, raising concerns that innovation finance may inevitably face setbacks in the future.

According to the four major financial holding companies?KB, Shinhan, Hana, and Woori?on the 19th, except for the completion of existing domestic and international M&A projects, there has been no progress in landing major M&A deals since the second half of last year.

Originally, each financial holding company supplemented group weaknesses through M&A, including domestic insurance companies, trust companies, and overseas subsidiaries to establish footholds for overseas expansion. For example, KB Financial Group's life insurance competitiveness within the group was only ranked 17th by assets in 2019, but this improved with the acquisition of Prudential Life Insurance for 2.34 trillion won in August last year. It posted nearly 200 billion won in earnings in the first half alone, with a contribution ratio surging to 7.7%. Shinhan Financial Group also recorded a net profit of 216.8 billion won in the first half of this year from Orange Life, which it secured by investing a total of 3.2489 trillion won, an increase of 57.7% compared to the same period last year.

However, KB Financial Group has not conducted any large-scale M&A since acquiring Prudential Life Insurance. Although KB Kookmin Card achieved an M&A result by acquiring 50.99% of J Fintech shares in January this year, the scale was insignificant at around 24 billion won.

The situation is similar for Shinhan Financial Group. Shinhan Financial acquired 59.15% of Orange Life shares for 2.2989 trillion won in September 2018 and also purchased 60% of Asia Trust shares for 193.7 billion won in October of the same year. Since then, it has expanded its non-bank business division by acquiring remaining shares and incorporating subsidiaries. It actively pursued overseas financial company M&A, including Vietnam consumer finance company PVFC and Indonesian asset management company Archipelago in 2018-2019, and acquired venture investment company Neoplux, which Doosan Group put up for sale as part of restructuring, in August last year. Since then, apart from spending 360 million won to acquire the remaining shares of Neoplux in January this year, there have been no notable M&A achievements.

Hana Financial Group has focused on maximizing synergy with acquired companies rather than large-scale M&A involving significant capital since acquiring Hana Capital in February 2018, Vietnam Investment and Development Bank in November 2019, and The-K Non-Life Insurance in February last year.

Woori Financial Group, after launching as a holding company in January 2019, made aggressive moves by acquiring Dongyang Asset Management, ABL Global Asset Management, and International Asset Trust in the same year, and Ajou Capital in December last year. This year, it has concentrated on completing the full subsidiary incorporation of Woori Financial Capital without additional M&A.

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Banks have established financial holding company systems for aggressive M&A, but the original purpose seems to have been undermined. Under the Bank Act, banks can secure investment shares up to 40% of their own capital, but under the financial holding company system, they can hold investment shares up to 130% of their own capital. This allows additional investment capacity, making it easier to grow through acquiring non-bank financial companies and diversify business.

However, financial holding companies have sufficient investment firepower for M&A and still have the capacity to expand further. According to the latest report from Korea Credit Rating, as of the end of March this year, the double leverage ratio of domestic financial holding companies was 114.8%, corresponding to grade 1 in the Financial Supervisory Service's financial structure stability evaluation index.

The problem is that it has become more difficult to acquire non-bank financial companies domestically due to increased regulatory risks. The rapid liquidity expansion has also contributed to a rise in the corporate value of non-bank financial companies, reducing M&A opportunities.

In particular, during the liquidity market caused by COVID-19, many securities firms and capital companies recorded record-high operating performances, which also contributed to the overall increase in the corporate value of non-bank financial companies. As acquisition prices rose, the number of M&A targets decreased. The increase in geopolitical risks beyond the control of financial companies is also cited as a factor.

Kim Jung-hoon, a researcher at Korea Credit Rating, pointed out, "Large-scale investments in securities and capital companies continue to improve profitability, and the risk profile of operating assets handled by non-bank financial companies is also expanding."

A financial holding company official said, "The recent slowdown in M&A may also be due to the fact that the group's portfolio has reached a certain completion stage through aggressive moves so far. From the perspective of global expansion, there could have been more overseas share acquisitions, but it is regrettable that exchanges have been restricted due to the suspension of overseas business trips caused by COVID-19."

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