Korean banks flex muscles for alternative assets; Kookmin, Shinhan may invest in KKR’s fund

South Korea’s Kookmin Bank and Shinhan Bank are consdering investing 30 billion won ($26 million) each to a private equity buyout fund which KKR & Co. is raising for the target size of $7 billion, while Hana Bank set a target of doubling overseas alternative investments to $600 million in 2017 from last year, according to the banks’ sources.

Kookmin and Shinhan are also considering investing in infrastructure-focused private equity funds being raised by Ares Management, Partners Group and Macquarie Group. They have earmarked about 100 billion to 200 billion won ($88 million to $176 million) each for domestic and overseas private equity funds this year.

The three lenders are among a handful of domestic banks making their foray into alternative investments ranging from private equity funds, infrastructure and aviation financing to private debt funds.

Hit by squeezed lending margins and the government crackdown on mortgage and consumer loans, South Korean banks are gearing up to expand alternative investments as they are moving to resume cross-border investments which have almost come to a halt since the 2008 financial crisis.

They expect alternative investments to serve as a platform for new revenue sources such as M&A financing and co-investments, as well as building networks with the invested company.

Alternative investments by the banks are in their infancy, compared with securities and insurance firms in the country. But they have room to grow from the current 1% of total assets, or under 500 billion won for each lender, to as much as 3%, said banking sources on Feb. 21.

“Banks’ deposit products have maturities of less than five years generally. The fact that they invest in offshore private equity buyout funds which take longer than 10 years to redeem has a symbolic meaning: they will push for alternative investments in full swing,” said a private equity fund source.

VARING PREFERENCES

The lenders take advantage of close networks with affiliated brokerage and insurance companies which have already been making an aggressive push into the offshore alternative investment market.

Depending on the specialty of affiliated companies, preferences for alternative assets vary by bank slightly.

Hana Bank is chasing overseas energy infrastructure and aviation financing which produce a steady stream of cash flows. The bank, the country’s first lender that broke into the aircraft financing market, is teaming up with its parent Hana Financial Investment Co. Ltd. for overseas alternative investment.

“We set this year’s target for overseas alternative investment at $600 million, twice as much as last year,” said a Hana Bank source.

Kookmin Bank, the country’s top investor in the domestic infrastructure market, is working with its affiliate KB Asset Management. Kookmin is upbeat about offshore infrastructure and domestic non-performing loans.

Shinhan Bank pioneered overseas alternative investments as a domestic bank. It is believed to have knowhow and in-house professionals for a range of alternative asset classes, including venture capital and private debt funds.

NongHyup Bank, a flagship unit of South Korea’s agricultural cooperative, has been raising its exposure to overseas infrastructure, jointly with brokerage and life insurance affiliates – NH Investment & Securities Co. Ltd. and NongHyup Life Insurance Co. Ltd.

Woori Bank is planning to resume alternative investment this year, after the government, its largest shareholder, had sold part of its stake to private investors. It focuses on overseas commercial buildings and aviation financing.

Their foray into the alternative investment market comes as domestic insurance companies are taking a bolder step toward buyout and hedge funds to extend the duration of liabilities, ahead of the adoption of a new financial reporting standard.

The banking sources said that they would tread cautiously in expanding alternative investments, mindful of the maturity mismatch between deposit products and alternative assets.

“We are approaching alternative investments with caution, given the possibility of principal losses and their relatively long investment period,” a vice president of a South Korean bank told the Korea Economic Daily. “Alternative assets, which currently represent less than 1% of total assets at local banks, are likely to increase to around 3% for the medium and long term.”

At end-September 2016, three percent of top five South Korean banks’ total assets represents 44 trillion won of 1,471 trillion won.

By Dongwook Jwa and Eunjung Kim

leftking@hankyung.com