COURSE

CORPORATE FINANCE

LECTUR
ER

PROFESSOR KWANGWOO PARK

CASE ANALYSIS
SHINHAN FINANCIAL GROUP (A)
(PRODUCT NUMBER: HBS 9-305-075)

TEAM MEMBERS

ABRAHAM
20134725
STEPHEN
20134777
STEVEN
20134778
WINNIE
20134788

DECEMBER 8, 2014

A.

MENSAH
MAGARA
BAMEKA
KABATESI

1. (1) Why many Korean banks suffer from the financial distress after the
onset of the Asian financial crisis?
i.
Many experts believe and argue that the banking community will not be
affected. Too big to fail policy.
ii.
Huge and sudden reversal of capital inflows; economies that had been
attracting large amounts of foreign capital suddenly became subject to
withdrawals of short-term lines of credit, an exodus of portfolio capital
Offshore flight by domestic investors.
iii.
Conglomerate and Government Dependencies; business conglomerates and
the government in a close relationship to one another and Korean banks did
not ask them to present consolidated financial statements to assess the
financial positions and performances of the business groups as a whole. The
result was a highly leverage corporate sector and a banking sector whose
financial health was dependent upon that of the corporate sector.
iv.
Most banks were allowed to invest in stocks and real assets on their own
account, the values of their portfolios became directly vulnerable to asset
price fluctuations as well. Koreas real estate market went through price
bubble.
v.
Exposure to exchange rate risk, between 1995 and 1997, the international
claims had risen by 30% from 77 billion dollars to 103 billion. The banks both
local and international enjoyed implicit government guarantees against the
insolvency of Korean banks and could thus take higher risks.
Why not in the past?
i.

The inherent solvency of banks was precarious, they relied on central

government for bailout periodically since 1992.
ii.
Globalization, high savings and investments brought rapid growth which
made the bank stable.
Why some banks like Shinhan Bank remained healthy?
i.
ii.

Shinhan bank since establishment in 1982 served primarily middle market

customers rather than the giant chaebols.
Shinhan bank had a strong financial base retail-lending franchise.
2. (1) Discuss the One Portal Network strategy.
The One Portal Network strategy allows each subsidiary company to master
its own product development while product distribution and customer
relationship would be managed through a single point of contact. Corporate
and retail customers would have access to financial solutions at any single
point of contact with SFG. It would require each subsidiary to integrate
physical and specialized branches, and enhance cross selling by sharing
customer information through integrated data-ware housing and customer
relationship management systems.
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Was it successful or not? Why?

Set five goals to guide the one portal strategy; Optimize the
organizations governance structure by restructuring into a holding company,
Achieve critical scale and enhance the core competencies of the operating
subsidies to establish number one position in banking and top 3 in the other
business areas, Establish and consolidate the one portal network, achieve
cost efficiency and introduce a performance-based culture and enforce a
customer oriented group culture.
Yes, SFG achieve four out of the five goals of the one portal network strategy
except it cost around 6 trillion won as weary customers transferred funds to
other banks.
3(1) Discuss SFGs post-merger integration (PMI) strategy.
Dual bank- New organizational structure and integration. The two banks
remained separate legal entities, allow SFG to have a more systematic
discussions about creating a new bank, business operations and a new
culture. This would lead to a more business oriented and constructive
discussion without the baggage of who won in each area.
Joint Management Committee- This was to guide the dual bank system to
act as a decision making body during the integration process. This eight
member committee comprised of members from both banks and would
approve all integration activities. This was further divided into ten subcommittees, each responsible for various priorities of emotional and
operational cohesiveness.
Obtaining listing on the NYSE (New York Securities Exchange) - SFGs
long term vision was to create an international presence of the group by
listing on the NYSE. Their aim was that one day it would compete with
Citibank and other global players who had begun to show signs of interest in
the Korean market.
How different is the strategy compared to any conventional Korean
PMI practices?

The conventional Korean PMI, the initial merger integration involved

discussions dominated by human resource issues and political
agendas.
Fighting for leadership positions mostly characterized Koreas merger
processes.

Evaluate the Shinhan Bank- Chohung Bank merger as of November

2007 based on the planned PMI strategy.

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The Shinhan Bank-Chohung Bank merger took a series of processes and

procedures. These include:

Emotional integration- This had the Seorabal summit, Run together,

Jump together, Sing-sing together and informal emotional integration
activities. By end of 2004, management felt that these activities had
made progress towards bringing the two groups together.
Operational integration-this included the following aspects like Branch
management & retail marketing, integrated service model, IT
integration, Credit and risk management, Co-branding and Co-locating.
By the end of 2004, the one portal vision was beginning to take hold. SFG had
successfully acquired CHB, was now listed on NYSE, and had integrated all of
CHB and SFGs ATM and customer services. (Please refer to appendix for
Diagrams)
4. (2) Discuss the similarities and differences of the financial crisis that
Asian countries were experiencing in the late 1990s and the financial crisis
that Europe recently experienced.
Similarities
1. Speculative exchange rate or currency crisis
All Asian countries experienced currency crises: The sequence of abandonment of
pegs, or the equivalent, was Thailand, the Philippines, Malaysia, Indonesia, and
Korea. The foreign exchange depreciations, in turn, further fueled the panic,
weakened balance sheets, exacerbated recessions, at least in the short run, and
constrained policy choices.
The individual euro area countries, of course, could not have classic currency crises
because
their
currencies were not their own. Their crises were manifested in a surge in interest
rates for public and private borrowers as maturity mismatches became exposed. As
in Iceland, Cypruss imposition of capital controls was broadly consistent with what
one sees in currency crises.
2. Sudden Stop (Capital account or balance sheet) crisis
All five Asian countries also experienced sudden stops as they had become reliant
on
net
foreign
capital inflows to finance their current account deficits which had averaged 4.5
percent of GDP during the199496 period. Almost all of the 10 European countries
fit the classic pattern of sudden stops of capital inflows that had financed oversized
current account deficits.
3. Debt (external debt of the country or the public sectors external or total
debt) crises
The external deficits were largely associated with the large-scale foreign borrowing
by
the
private
sector, not the public sector
4. Systemic banking crises
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High levels of financial leverage, excessive reliance on short-term debt, and

weaknesses in supervisory and regulatory systems exacerbated the banking crises.
Differences
1. Exchange rate regimes
The Asian countries had fixed or semi-fixed exchange rates, which was a source of
problems
ex ante because the exchange rate regimes encouraged currency mismatches and
the buildup of excessive foreign debts by the private sector, including financial
institutions. Additional source of problems when the pegs broke or were broken, and
the sequential collapse of pegs contributed to contagion in the region. The collapse
of the pegs magnified recessions in the short run, via balance sheet effects.
In contrast, the European crisis countries, with the exception of Iceland and in
principle
Latvia,
Hungary, and Romania, were locked together in an irrevocable monetary union.
Latvia
chose
to
behave
as if it had no choice. That choice may well have been the best course for Latvia,
but
that
choice
had
no
significant implications for other countries in the European Union.
2. Breadth of crises
The European crises were broader, affecting, by the criteria applied in this paper, 10
countries
(and several more had the potential to be affected). In contrast, only five countries
were caught up in the Asian crises. Other economies in the Asian region were
affected, but not to a level requiring international rescues; they included Hong Kong,
China; Taipei, China; and Singapore, as well as the Peoples Republic of China (PRC).
It is often argued that a principal difference between the Asian and the European
financial
crises
is that the former involved emerging market and developing countries, and the
latter
involved
advanced
countries.
3. Persistence of crises
The Asian and the European crises is that the former were rather transitory events
measured by the number of years that passed before real GDP regained its precrisis level. In Asia, the gap was just two years for Korea and the Philippines, three
years for Malaysia, four years for Thailand, and five years for Indonesia.
In the European crisis countries, where the declines in real GDP started in 2008 or
2009 in connection with the global financial crisis, only one countrys real GDP
(Iceland) is projected to have reached its previous level by 2013 five years later. The
IMF projects that three other countries (Ireland, Romania, and Latvia) will reach that
point in 2015, after seven or eight years, and that Hungary will reach it in 2017,
after nine years. The remaining countries, all in the euro area, do not make it until
after 2018, 10 or 11 years after growth turned negative
4. Role of the private and public sectors
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The Asian crises generally involved excesses and imbalances associated with the
private sector: current account deficits, external debts, over-reliance on financing
via debt versus equity, and weak financial systems threatened by credit booms.
Moreover, the Asian governments, in general, were in a position to absorb the
private sector deleveraging, in particular by banks, on their balance sheets. The
resolution of a substantial portion of the resulting international debt problems
largely involved private sector-to-private-sector negotiations without significant
government intermediation. On the other hand, the origins of the European crises
were also largely, but not exclusively, in the private sector in connection with credit
booms. Their resolution, however, quickly involved the public sector. Moreover, in
many but not all the European cases, governments were not positioned easily to
absorb the debts of the private sectoragain, those of banks on their balance
sheets. In Europe, private sector debt problems more virulently metastasized into
public sector debt problems.
5. Preparedness.
Another difference in the origins of the crises in Asia and Europe is that the
Europeans were unprepared to deal with their crises, in particular, in the face of
their substantially higher degree of economic and financial integration. The lack of
European preparedness included an absence of institutions experienced at
managing crises for a group of countries bound together in a monetary union. This
institutional weakness, which was not relevant in Asia, where countries were on
their own, came on top of the fact that a substantial number of the European
countries had stock and/or flow fiscal problems that meant that they were
substantially less well positioned to deal with their own problems even if they could
have ignored spillover and contagion effects, which they could not. Although the
individual Asian countries were the source and recipients of substantial contagion
from their neighbors, they were not closely locked together economically and
financially.

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Appendix - Summary Diagrams

Diagram 1

Diagram 2

Diagram 3

Diagram 4

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