Banking on Korea: Face to Face with Wilfred Horie
President and CEO, Korea First Bank
American Chamber of Commerce in Korea Journal
September-October 2001 

"Korea First Bank Sold to Foreigners!" 

This was the headline that greeted startled readers at the end of 1999 when the deal between the Korean government and Newbridge Capital of the USA was finally inked after laborious negotiations. The ailing commercial bank was the first ever Korean bank to fall into foreign hands. How could such a thing happen?

As part of the deal with the IMF in the darkest days of the Economic Crisis, the Korean government agreed to sell controlling stakes in two troubled banks, KFB and Seoul Bank. Naysayers opined that it would not be feasible to parachute a foreign management team into a Korean bank and turn it round: business cultures and practices were just too different. Mission impossible?

The man Newbridge chose to head up KFB proved equal to the task. An ex­Special Forces Officer, a former EVP of Associates First Capital Corporation (overseeing assets of US$13 billion) and ex-Head of the Associates AIC Corp Japan, Wilfred Horie has frustrated the doomsayers by putting the bank back in the black. In doing so, he has won over a skeptical press and even stood up and said "No" to Government. Now the first bank ever sold to foreigners has become a market leader with competitors scurrying to follow KFB's lead in the provision of products, services and managerial practices. In short, KFB has proven that foreign investment and restructuring do add value.

Recently, the man who is probably the most important foreign CEO in Korea took time out of a very busy schedule to talk to the Journal about turning the bank around, handling government, media and labor relations - and why his wife thinks he is setting a bad example....

 THE WIND OF CHANGE

 J: What made Newbridge decide to buy into Korea First Bank? 

WH: It was an attractive property. The business model used to acquire the bank had been used before -to acquire American Savings Bank in the mid 1980s. Newbridge had successfully turned that round and created value. The key was that it was a very strong, but damaged franchise, so the opportunity for a turnaround was in our favor. Korea First had been a premier bank for over three decades. 

J: When you came in, what were the most significant changes you made?

 WH: The most important thing was to transform the bank from a very traditional (corporate) focus to one on SMEs and retail business. That's easier said than done.

 The second thing is we installed very stringent financial disciplines in the bank. We had financials that took 35 to 40 days - now we have them in three or four days.

 As a comparison, I suspect that world class financial institutions would take about five days. You need to have operating numbers in a timely fashion to make decisions. As a bank, we insisted our corporate clients have solid financials, but then the bank itself closed its books twice a year, so we didn't have the kind of reporting that allowed us to make the right decisions. That has changed.

 J: How about on the HR front?

 WH: One of the first things I said was that there would be no unemployment, there would be reemployment. This meant that if you were willing to learn new skills and adapt to the new changes, you would have a job. We had early retirement on April 1st 2000: 171 senior managers took that opportunity to exit, as well as 60 or so union members.

 J: Why did the union members leave?

 WH: Clearly the union leadership thought that here was an opportunity for people who had reached a certain age and not been promoted, to take advantage of an attractive package.  Afterwards, we selected new people for the departments and had a wholesale change in branch management, so the new leadership of the bank clearly became agents of change. In July we hired 60 new employees: we had something like 1600 applicants. We have had great success with that group of people. (At that time) we were the only bank which was hiring.

J: How about customer relations management?

WH: The bank was strictly transaction oriented: people came in to make deposits. That is all our employees focused on. So in my inaugural speech I focused on: customer is the boss, w need to understand the needs of the customer; we need to understand customer satisfaction. We told them to do the "Three Ss": Smile, Serve and Sell. Three actionable items were: b friendlier, be more helpful and take action on customer requests. So this i part of our programs: sales and services mindset training.

 J: And product range?

 WH: We have launched a mortgage product which is very similar to what you would find in the U.S. - it is long term, in many cases fixed rate, and requiring less of a down-payment. We have an auto product, a quick cash loan (which allows new customers to come in and get a loan quickly - previously they had to be customers for a year to get this). We have expanded the different types of credit card product we have, and installed a private banking platform for "Platinum Customers". We also offer third party investment products through companies like Templeton, Samsung and Fidelity.

 J: To turn to your loan portfolio: you used to be taking care of most of the chaebol: now you only have SK...

 WH: In the early `90s KFB had SK, Daewoo and LG. We still have significant positions with other companies, but we have, over the last 18 months, reduced our exposure to any one large company to meet regulatory and internal guidelines.

 J: Did this cause consternation among your managers - pulling away from the Big Boys?

 WH: No, I think the explanation of the need to reduce exposure and risk was well understood.

 STRANGER IN A STRANGE LAND

 J: There was considerable speculation at the time of the buy-in that you couldn't parachute foreign managers into the top level of a Korean bank... 

WH: Clearly, this is a very traditional business and highly regulated. As the first foreign executive to head up a Korean bank, it was something new; our managerial style caused some concerns. We thought we were doing the right things, but with our employees and the regulators initially, we found it to be a challenge. But at KFB the foreign executives are here to bring the new practices into the bank and to close the gap between foreign management practices and the Korean practices of the past. In time, the Korean staff will become the owners of these processes. In the meantime, the management team has done a tremendous job of integrating these new practices.

 Most of our general managers meetings are in English so we have a team of six interpreters. We also use consultants: we use them to identify areas that need change, they pull together the data and make recommendations, but the decision and implementation is left to management. It was a significant advantage to us, allowing us to move as quickly as we have. A former executive of another bank said to one of our executives: "The difference is we have used consultants before but didn't have the confidence to make the changes they recommended. You guys have executed."

 J: You have grafted very American standard practices onto a local institution. There are some who say that Korea has its own standards and practices - do you have any sympathy with these views?

 WH: Well, you have to be sensitive to the culture and to the way business is done, but basics don't change. Credit risk, market risk, interest rate risk these are problems you face in any market. The prudence of risk management is real and just because this is Korea. You don't close your eyes to it .We are responsible for managing this risk so we need to understand it to manage it. Prudently.

 J: Any other "foreign" customs you have introduced?

 WH: I have gone out to visit customers large and small. I went to see the CFO of a major company. He said he had been there 20 years and had never heard of a Korean bank CEO visiting! I said: "We appreciate the forex business and various other transactions, but your deposits are looking a little anemic. Why don't you park more money with us?" Following that visit there was a significant deposit made. I also went out to Dongdaemun, visiting a lot of the small garment and shoe stores. I sat and had tea with some of the merchants. They were flabbergasted that I would take the time to come and see them!

 J: Did you learn anything from them?

 WH: Absolutely. It's vital in other countries to call on customers. But here I guess it's just taken for granted that people will come and do business with your bank because of proximity. Interestingly, in the surveys we have done, indications are that people bank based on convenience and location. That has to change: our goals are to make people aware of the soundness of the bank they are dealing with as well as providing quality service.

 LABOR RELATIONS AND PR

 J: Let's move on to thornier issues. Labor? 

WH: My first day at the office I had a stack of approvals to go through to run the bank. That took an enormous amount of time. It was also customary to meet certain people - the regulators and so on. Meeting the chairman of the union on the first day did not happen. That became an issue. The second morning when I met him he was very upset. I had to tell him that quite frankly I was not here to win a popularity contest, that I had more important things to do such as go through the approvals - one of which was to approve a salary increase for all workers. I said, "I am sure you would value this activity more than a courtesy call?" I asked him to my office the next morning: we had coffee and tea, we told each other of our backgrounds and agreed to work together. Subsequent to that we have had a standing luncheon every month.

 J: Last July KFB's union voted not to follow the umbrella union in striking....

 WH: Yes. We had committed to trying to restore the employees' salary levels, we had said there would be reemployment not unemployment, and on the bank's 71st anniversary we had had a beer party when all the Seoul area staff came and had the chance to meet the new management. They observed, I guess, that these guys are not so bad after all, so our employees voted not to join the national strike

 J: Any advice on labor from a managerial perspective?

 WH: I think there is misinformation; the message that Korea has militant unions paralyzing the country. In reality you have a very small number of unions, primarily around financial institutions. So you have the activities of a small group damaging the (national) image. But if people are treated fairly and improving job satisfaction is a goal - better relations will develop. It isn't just about money: it's about the work environment, training, skills .... it's about the treatment people receive. If people are happy - they cooperate.

 J: On PR: when you first arrived there was a lot of suspicion. You have really turned that round. Comments?

 WH: Like any market, the media wishes to sell a paper, (so) they tend to use selected sound bites to get attention. Some people have said "It's best to keep quiet", but to me, if you don't give interviews and talk, then the media start fabricating stories. In my view you are better off being honest about what you are trying to do and being very frank. A lot of the writers try to trap you with questions, but if you are being honest about your goals, normally you will be OK. As a matter of fact, I have had drinks with them and asked, "Why do you write these stories?" They said they understood my point - but they say that the sentiment of the Korean people is important to how they write, (so) any foreign executive coming in to this market needs to come in with eyes wide open. But we have good PR people! (laughs - the CEO's PR man is sitting in on the interview)

 JUST SAY NO

 J: The big story in the sector this year has been your refusal to accept a government request to purchase bonds. Can you bring us up to date on this situation?

 WH: Yeah, these were bonds maturing early this year. The bonds had several underlying credits that represented a basket of companies. We had spent twelve months deliberately reducing exposure to many of these companies! So "No" meant, "We do not want to participate in a basket bond - but we would be willing to look at individual bonds and decide". That is just prudent management. Management of KFB is responsible for asset quality - we are no longer playing a social role. Banks - our bank anyway! - should be managed for profitability, otherwise the economy will be unsound. We were criticized, people were saying we were selfish, profit motivated, etc, but subsequent to that, we have seen other bank executives also saying they need to be profitable - for their credit expenses and to provide a fair return to the shareholders.

 J: What have Korean bank CEOs been saying to you? Do you think they were waiting for someone like you to come in as a kind of change agent?

 WH: I think that many of them felt that they wanted to say "No" in the past but the system did not permit it. Subsequent to that (our refusal), other banks have declined to participate in certain transactions. The government have said that want to see market forces take over, and it is happening more and more.

 J: What kind of pressure were you under in this situation? Did the regulators jump on you?

 WH: Among the regulators, a few individuals who were responsible for this particular transaction were obviously upset. But at the time the Financial Supervisory Service issued a press release saying that they recognized that banks needed to exercise independence and they had no intention of punishing the bank or its officers. That doesn't mean we are popular, though! (laughs)

 J: How have you been rated externally?

 WH: Last year around August, we had a visit by Moodys and S&P. It's clear that financials are improving. Subsequent to that, we had a two step upgrade from both. (To BA1 and BB Plus respectively; at the time, the best credit ratings among Korean Commercial Banks) More recently we have had an upgrade from Fitch also; we are looking forward to increasing our ratings even further. BIS (Bank of International Settlements) ratios have also risen, ROA (Return on Asset) numbers have gone up, and so on.

 THE NEXT STEPS

J: Let's talk future. When are you planning to list?

 WH: We need to have this year behind us - it has not been easy with the business downturn. I think the earliest possible date will be early 2003. Next year first half is going to be critical. Listing will be helpful in improving transparency and visibility.

 J: What's on your "To Do" list:

 WH: We are continuously fine­ tuning. We did most major structural transformations last year. This year we are looking at branch reengineering, to centralize more efficiently. There is more to do with IT: we have a pretty aggressive plan to upgrade our capabilities, both internally and on the customer side. We want to provide products and services in a more efficient way: right now, we are taking too long to deliver and develop.

 J: How well do you think Korea is doing on the restructuring front?

 WH: Well this can't take place overnight: in the UK under Thatcher, it took ten years. Compared to Asia? Look at Thailand - they are going nowhere. Look at Indonesia - it's a basket case. (In Korea) we have seen consolidations on the financial side: it will come together if it continues. At the end of the day, you will see Korea in a year or two well-positioned as a world-class banking environment. They still have challenges - the insurance companies, ITCs, etc. But the focus is on banks and I think that is right: unless the banks can become healthy and can absorb the NPLs, they cannot support the economy. The interesting thing today is that for the first time in maybe 50 years, the Bank of Korea is saying consumer consumption is good - and so maybe exports are not so good. If you look at the recovery after `97, it was export driven; this recession is export driven as well. So clearly this economy is too driven by exports and needs to diversify. The Philippines are planning to be the outsource hub of Asia, Singapore is going to be the e­commerce hub, Malaysia is talking about being a multimedia center. These are three countries planning to maximize their human intellectual property - but Korea is still stuck on exports.

 J: Finally, I read that you are partial to poktangju (A boilermaker of beer and whisky - Ed)

 WH: Well, I was in Special Forces. The training is to put you behind the lines, where you have to follow local customs - eat what the locals eat, live where they live, etc. So you learn to play the local game. And I think that having the poktangju here - well, you want something that bonds you. As long as you don't have more than five you should be OK. But my wife thinks I'm nuts - she thinks I should be setting a good example! (laughs)

Yu-kyeong Kim is an AMCHAM intern who is interested in research positions. Andy Salmon is AMCHAM Publications Manager.

 

KFB: First!

Korea First Bank is living up to its name by introducing concepts, practices, products and services that competitors are scurrying to follow: Here are some:

 Consultant Control: KFB has hired outside consultants in large numbers - and implemented their recommendations.

 Credible Credit Ratings: Introduction of Advanced Financial Systems (personal credit scoring and a post-management of loans). Credit decisions are tied to credit ratings and future cash flow analyses. No more outdated lending practices, based on collateral.

 Financial Times: Time permitted for financial reporting has now been cut from 30 working days to 3/4 working days.

 Maintaining Balance: Customers pay a monthly commission of 2,000won if the outstanding balance of their account drops below 100,000won

 Minimum Deposit: A minimum deposit of 50,000 won is necessary to open an account.

 Mortgages Modernized: Mortgages are custom tailored and priced to risk.

 Quick Cash: Small, fast loans can be approved on the spot.

 Strategic Refocus: KFB is steering its main business away from corporate and toward retail banking.

 KFB: Tale of the Tape

Category	12/1999	6/2001
Net Profits	- 10,046 Bil Won	200.2 Bil Won
BIS Adequacy Ratio	11.44%	13.29%
Return on Assets	-3.21%	1.55%
Return on Equity	-52.88%	28.33%