Korea's long bank merger transitions hold up benefits

Such as cost-savings, among others.

The long transition periods following bank mergers in Korea delay the materialisation of cost-savings and other benefits for the entities involved.

According to a release from Fitch Ratings, the share swap between Kyungnam Bank (KNB) and BNK Financial Group (BNK), finalised in early June, is the latest bank acquisition completed under a holding company in Korea.

KNB and Busan Bank are wholly owned by BNK following the share swap, but the two banks are likely to maintain their respective brand names and operations, potentially through the medium term.

This would push back the receipt of benefits from the consolidation, which include cost savings through increased economies of scale and eliminating duplicate functions, synergies created from a common customer base, and the minimisation of the risk of affiliated banks competing against each other.

Here's more from Fitch Ratings:

The KNB-BNK acquisition follows long transition periods in other recent Korean bank mergers that took place under holding companies. Notably, Hana Financial Group has kept Hana Bank (A-/Stable) and Korea Exchange Bank (KEB; A-/Stable) separate after it acquired the latter in 2012.

JB Financial Group (JBFG) has also kept its two banks, Jeonbuk Bank and Kwangju Bank separate. Shinhan Financial Group (SFG) is unlikely to integrate Jeju Bank with Shinhan Bank (A/Stable), to retain customers in Jeju. SFG has had more than 60% of Jeju Bank since 2002.

Among the reasons cited by management for maintaining separate subsidiary brand identities and operations are strong customer loyalties in Korea for local and regional banks. Maintaining these identities therefore can help to retain customers during a transition.

However, objections from labour unions are often the more significant reason for maintaining separate operations and identities. Having a transition period, which can stretch into several years, can help to minimise the potential for labour disruption during the consolidation phase.

In the case of Hana and KEB, the holding company's management agreed with KEB's labour union to keep the bank independently managed for five years until February 2017. Efforts by Hana to speed up the consolidation process were overturned by a court decision in February 2015, although the firm has filed an objection and is awaiting a ruling.

Furthermore, during the transition periods, loan book growths for the subsidiary banks tend to be above industry average as management seeks to improve their firms' positions within the larger financial group.

BSB's loan book growth (7.2%) for the nine months until end-1Q15 was higher than the commercial banks average (5.4%). Likewise, KEB's growth (13.9%) was higher than the average (11.1%) for the three years until 1Q15. This fast growth in turn could put pressure on the banks' capitalisation.