[Song Seungseop's Financial Light] Why Are Financial Holding Companies So Thirsty for M&A?

Intense Competition Amid Ultra-Low Interest Rates Lowers Bank Contributions
Non-Bank Sectors Like Securities and Insurance See Sharp Growth
Financial Holding Companies Secure 'Ammunition' for M&A Efforts

Finance is difficult. It is entangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even if you know nothing about finance, we light the 'fire' of financial understanding with 'light' stories that you can grasp immediately.

[Asia Economy Reporter Song Seung-seop] Mergers and acquisitions (M&A) have become a trend in the corporate market. Despite COVID-19 in the second half of last year, the amount of M&A transactions increased by 15% compared to the previous year. Although acquisitions and mergers require large sums of money, companies judged that the ripple effects afterward are much greater. Financial holding companies are no exception; financial firms are seeking M&A deals and raising funds to acquire companies. Why have financial firms focused on M&A? And what kinds of companies do they want to acquire?

Financial firms are actively pursuing M&A because they believe there are limits to growth with their existing affiliates. In the past, most of the financial holding companies' profits came from banks. They executed loans using depositors' money and earned interest to generate performance.

However, the banking management environment is worsening. Due to COVID-19 and economic downturns, countries worldwide have maintained a long period of ultra-low interest rates. Competition has intensified with the emergence of internet-only banks and big tech companies. Government policies to tighten loans, dividend restrictions, provisions, and various regulatory bills also worsen banks' profitability. Financial holding companies can no longer rely solely on banks to sustain themselves.

Meanwhile, the growth of non-bank sectors (securities firms, insurance companies, card companies, capital companies) is very steep. According to the Financial Supervisory Service's report on the "2020 Financial Holding Companies' Management Performance," data on assets and performance of 10 domestic financial holding companies (KB, Shinhan, Hana, Woori, NongHyup, BNK, DGB, JB, Korea Investment, Meritz) are available. They recorded total assets of 2,946.3 trillion KRW, with financial investment business showing a very steep growth rate of 21.1%. Next was credit-specialized finance companies, including card companies, increasing by 19.5%, followed by insurance growing by 18.2%. Banks only increased by 9.9%.

Non-bank contribution approaches half, dazzling securities firms' performance

Do you understand why financial holding companies are so actively engaging in M&A? Currently, the 10 financial holding companies have 264 subsidiaries and sub-subsidiaries. This is 21 (8.6%) more than a year ago. KB Financial Group acquired 12 subsidiaries including Prudential Life, and Shinhan Financial Group acquired 7 subsidiaries including Neoplux. Woori Financial and Hana Financial acquired 2 companies including Aju Capital and 1 company, The-K Non-Life Insurance.

How about actual performance? Although simple comparisons are difficult due to different scales by industry, these subsidiaries are playing a significant role as profit drivers. In the first quarter, non-bank affiliates contributed 48.6% of KB Financial Group's net profit. In the first quarter of 2020, it was only 26.2%. Shinhan Financial Group also earned 48.1% of its total profit from non-bank sectors, an increase of 13.6 percentage points from last year. Within one year, half of the group's total profit came from non-bank sectors.

In particular, securities firms showed dazzling performance. Do you remember how many Donghak Ants (retail investors) rushed into the stock market after COVID-19? Trading volume and amounts surged, and massive funds poured into initial public offerings (IPOs), resulting in an unprecedented boom. In the first quarter, NH Investment & Securities of NongHyup Financial Group posted a net profit of 257.5 billion KRW, growing nearly 700% compared to a year ago. KB Securities grew by 153.8%, Shinhan Financial Investment and Hana Financial Investment grew by 260.4% and 192.6%, respectively.

Financial holding companies expect this trend to continue. They are preparing diligently to be able to buy good companies as soon as they come on the market. There are ongoing rumors that Shinhan Financial Group is targeting non-life insurance companies, and Woori Financial Group is eyeing securities firms. What other M&As will take place this year?