Incorporated: 1962 as Citizens National Bank
Total Assets: KRW 171.49 trillion ($145 billion)(2002)
Stock Exchanges: Korea New York
Ticker Symbol: KB
NAIC: 522110 Commercial Banking
Kookmin Bank is not only South Korea’s leading commercial bank, it is also a driving force behind the much-needed modernization of the country’s banking system. Created in 2001 through the merger of the former Kookmin Bank and Housing and Commercial Bank (H&CB), the new Kookmin Bank boasts assets of more than KRW 171 trillion ($145 billion), a nationwide branch network of nearly 1,200 offices, and more than 24 million customers—half of the country’s population. Altogether, Kookmin accounts for one-third of South Korea’s total bank deposits. The bank is also the country’s largest credit card issuer, with more than 14 million customers. Nearly all of the bank’s business remains in South Korea, although Kookmin operates branch offices in the United States, Luxembourg, New Zealand, and Japan in order to cater to Korean populations in those countries. In addition to its full range of consumer banking services, the company provides corporate lending and investment services. Since the merger, Kookmin has begun extending its loans portfolio beyond its traditional small- and medium-sized business base to include a greater share of large-scale corporate clients. Through subsidiaries, Kookmin is also active in real estate brokerage, development, and investment; trust management; venture capital investments; futures transactions; and credit investigation and loan collection. Traded on both the Korea and New York Stock Exchanges, Kookmin is headed by former H&CB chief executive Jung Tae Kim.
Government Banking Start-Ups in the 1960s
Kookmin and H&CB each had their origins in the development of South Korea’s commercial banking system in the 1960s. Both banks were formed by the Korean government with specific mandates. Kookmin was created in 1963 under the Citizens National Bank Act (“Citizens National” is an English translation of the Korean word Kookmin.) Majority owned by the Korean Government, Kookmin started out as a commercial bank limited to providing banking services to private customers and to small- and medium-sized businesses.
Similarly, H&CB was launched in 1967 as Korea Housing Finance Corporation, a government-owned vehicle to provide long-term, low-interest housing loans and mortgages to South Korea’s low- and middle-income population. The new company sold its first housing bonds to institutional investors in 1968, then, at the beginning of 1969, launched a Housing Lottery as a means of raising funds to support its mortgage pool.
Also in 1969, the South Korean government passed new legislation, changing the mortgage lender’s name to Korea Housing Bank. Under the legislation creating the new entity, Korea Housing Bank (KHB)was given the exclusive right to offer mortgages of more than ten years in South Korea. On the other hand, KHB’s focus was restricted almost entirely on the housing market, and no more than 20 percent of its lending portfolio was allowed to come from non-mortgage sources.
KHB continued to develop over the next decade, issuing a new National Housing Bond in 1973. Three years later, KHB began its first banking operation, forming the Workers’ Asset Formation Savings Deposit. In 1978, a new deposit fund was added, the Housing Subscription Tie Deposit. That was followed in 1980 with the creation of the Long-term Housing Installment Savings Deposit. One year later, the Korean government created a new National Housing Fund, which was placed under KHB auspices.
The 1980s saw KHB achieve further growth, including its first international expansion with the formation of a Tokyo branch in 1984. KHB also launched its own credit card service that year. The following year, it acquired Joo Eun Mutual Savings & Finance Co, taking on more of the features of a full-service bank while retaining its primary focus on mortgage lending. The bank continued to extend its range of services through the end of the decade, adding international banking in 1988 and trust banking in 1989.
Kookmin, which from the start had operated as a traditional consumer bank, also expanded during the 1980s. In 1984, Kookmin launched lending subsidiary Kookmin Leasing, then added its own credit card issuing subsidiary in 1987. In 1989, Kookmin launched its own banking trust operation.
With total deposits rising to KRW 10 trillion in 1990, Kookmin began establishing its own international operations, chiefly to provide banking services to Koreans living overseas. The company launched subsidiary Kookmin Bank Luxembourg as a portal to the European markets in 1992. That year, Kookmin also entered Japan, setting up a branch office in Tokyo. Two years later, Kookmin added a Singapore branch. By then, the bank’s total deposits had doubled, topping KRW 20 trillion.
Privatization in the 1990s
The Korean government had been shifting slowly toward privatization of the country’s banking system in the late 1980s and early 1990s. Kookmin’s turn came in September 1994, the year that the company was listed on the Korean Stock Exchange. In January of the following year, the bank was formally privatized when the Citizens National Bank act was repealed. Kookmin changed its name that year, becoming Kookmin Bank. Meanwhile, the government’s stake in the bank dropped back to under 24 percent.
Kookmin continued its expansion into the late 1990s, adding a branch in Hong Kong in 1996, then opening an office in Auckland, New Zealand, in 1997. In 1998, the bank also entered Brazil, opening a branch in Buenos Aires. Yet Kookmin’s main thrust remained its fast-growing domestic business. By 1997, the bank boasted more than KRW 40 trillion in deposits.
Kookmin also remained relatively unscathed by the 1997 collapse of Korea’s banking industry, which required a massive bailout from the International Monetary Fund. Instead, Kookmin picked up some of the pieces left over by the widespread banking failures. In 1998, Kookmin agreed to a government request that it acquire much of the failed Daedong Bank, adding 49 of its branch offices.
Six months later, Kookmin took on a new dimension when it acquired Korea Long Term Credit Bank, which, in contrast to Kookmin, emphasized financial bond deposits and featured a strong large-scale corporate financing business. The newly enlarged Kookmin now exceeded KRW 100 trillion in cumulative assets, making it Korea’s largest bank. Total deposits had also grown strongly, topping KRW 70 trillion by 2000. By then, Kookmin had added a new major shareholder, Goldman Sachs & Co, which invested $500 million in the bank.
Korea Housing Bank’s privatization began in 1995 with the revision of its founding legislation. At the beginning of 1996, KHB changed its name, becoming Housing & Commercial Bank of Korea, or H&CB. The bank then took a listing on the Korea Stock Exchange. The following year, H&CB’s privatization was completed as it now converted its status to that of a commercial bank. Part of H&CB’s privatization process, however, involved the loss of its monopoly on long-term mortgage lending. The company quickly slipped into its own economic crisis and began losing money.
In the face of mounting losses, H&CB made the unusual move of recruiting a new CEO from outside the banking industry. In 1998, the company appointed Kim Jung Tae to the bank’s top spot. Kim had already achieved his reputation as the leader of securities broker Dong won Securities Co. Under Kim, Dong won had paid off its debt load just ahead of the 1997 crash. As other Korean securities firms crumbled, Dongwon prospered, becoming the nation’s fifth largest.
Kim set to work the same magic at H&CB, famously cutting off the bank’s loans to toppling Daewoo, which collapsed the following year owing billions in debt. Kim also pulled the bank out of its loans with struggling semiconductor firm Hynix, accepting writeoffs of the company’s profits rather than becoming involved in that company’s shaky financial circumstances. Indeed, Kim instituted a new corporate culture at H&CB, insisting on replacing the traditional drive for sales volume with a focus on maximizing shareholder value.
H&CB began a streamlining effort by shedding a number of jobs, starting with the bank’s overgrown middle management. The bank also shut down a number of under-performing branches. The remaining 537 branch offices were revamped, shifting back office functions from the individual branches to the central office and shortening waiting times for customers.
By 1999, H&CB was once again churning out profits and growing strongly, winning a number of awards, including Best Domestic Commercial Bank in Korea from Finance Asia. Kim himself received acclaim, earning a spot on Institutional Investor’s list of the top 50 most influential bankers in Asia.
Our vision is to be the leading bank in Asia. To realize this vision, we will value and foster our four Kookmin Bank aspirations: to set the standards for excellence in customer service by offering competitive financial products and services supported by choice, convenience, and ease of access and information; to deliver stable earnings and a healthy balance sheet; to maximize value by achieving performance targets, creating sound asset quality, and capitalizing on growth opportunities; and to embrace a performance-based culture within a framework of strong corporate ethics and responsibility.
Korean Banking Powerhouse in the 2000s
At the beginning of the new century, the revitalized H&CB now claimed the number three spot among Korea’s top banks. It was also the country’s most profitable, boasting a return on equity of 22 percent. Kim, who had already stunned Korea’s financial community by accepting a salary of $1 per year, plus stock options (worth some $5 million at the end of his first year), once again surprised the country’s banking world when he led H&CB into merger talks with larger rival Kookmin at the end of 2000.
Such a move placed Kim’s own job in jeopardy—following Korean tradition, the chief executive of the larger merger partner generally retained the top spot—yet fit in with his commitment to promoting shareholder value. As Kim himself explained to Business Week: ’’Of course I’m not assured of the job. The opportunity presented by the merger was too great to pass up.”
Institutional investors from both sides, including H&CB-backer ING Bank and Kookmin’s Goldman Sachs, favored Kim for the merged bank’s top spot. Indeed, the largely foreign investor pool in both banks recognized that Kim was most likely to align the merged bank with international banking standards, shedding many of the traditional Korean banking community’s features that had led to the late 1990s financial collapse. The creation of a dominant banking entity in the Korean market was also expected to act as a motor for the modernization of the country’s entire banking industry.
Kookmin and H&CB signed the merger agreement in April 2001. The arrangement was presented as a merger of equals, despite Kookmin’s larger size, and called for the dissolution of both companies and the creation of a new bank, called Kookmin Bank. The merger was completed in November of that year, with the company listing on both the New York and Korean Stock Exchanges. By then, Kim Jung Tae had been appointed company CEO. Former Kookmin chief Kim Sang Hoon was given the largely titular chairman’s position.
The integration of the two banks proceeded smoothly, and by the end of 2002 Kookmin presented a streamlined, unified face as Korea’s leading bank. Under Kim, the bank had installed a single, highly modern information technology system similar to that used by the world’s largest banks. The company also began emphasizing performance and profitability over volume, while shying away from high-risk loans to Korea’s often highly indebted and unprofitably large-scale corporations. With total assets of more than KRW 171 trillion ($145 billion), Kookmin now steered toward its next goal—that of cracking the global top 25 of the world’s banks by 2005.
KB Credit Information Co., Ltd.; KB Investment Co. Ltd.; KB Investment Trust Management Co.; KB Real Estate Trust Company; Kookmin Credit Card., Ltd. (74.27%); Kookmin Data System Corporation; Kookmin Futures Co., Ltd.
Korea Development Bank; Woori Bank; Industrial Bank of Korea; Shinhan Bank; Cho Hung Bank; Korea Exchange Bank; Hana Bank; Koram Bank; Seoul Bank; Pusan Bank; Daegu Bank Ltd.; Korea Joint Bank.
- Citizens National (Kookmin) Bank is established under the Citizens National Bank Act.
- Korea Housing Finance Corporation is created as a provider of long-term, low-interest housing loans.
- Korea Housing Finance Corporation is reformed as Korean Housing Bank (KHB).
- KHB opens its first foreign branch office in Tokyo; Kookmin forms Kookmin Leasing.
- KHB acquires Joo Eun Savings & Finance Co.
- Kookmin issues its first credit cards.
- Kookmin opens its first foreign branches in Tokyo and Luxembourg.
- Kookmin is listed on the Korea Stock Exchange.
- Kookmin is privatized.
- KHB changes its name to Housing and Commercial Bank (H&CB).
- H&CB is privatized.
- Kookmin and H&CB agree to merger of equals.
- The merger is completed; “new” Kookmin is listed on the New York and Korea Stock Exchanges.
- Kookmin announces its goal of joining the top 25 global banks by 2005.
“The Bank That’s Rewriting All the Rules,” Business Week, April 8, 2002, p. 36.
Hamlin, Kevin, “Asia’s Most Influential Bankers,” Institutional Investor, August 1999, p. 41.
“Jung Tae Kim Creates a Korean Bank That Can Say No,” Asiamoney, May 2001, p. 34.
Kirk, Donald, “Riding Korea’s Big Tiger,” Institutional Investor, November 2002, p. 62.
“A Korean Banker Who Actually Makes Money,” Business Week, March 12, 2001, p. 26.