YK Hwang has only been in the job six months, but the internationally-trained banker and former CEO of Samsung Securities has big plans. Now at the helm of Woori Financial Group - after a stellar career with the Samsung Group - he wants to revolutionise the banking giant. In a wide-ranging interview, the chairman and CEO talks about Woori's privatization, why he bought LG Securities, the threat from Citigroup, and the cultural changes he believes will ensure that Woori becomes Korea's number one bank once again.

The big competitive event for Korean banks this year has been Citigroup's acquisition of Koram. How do you feel about this?

Hwang: Prior to the Koram acquisition, Citigroup had a relatively meaningful operation here with less than 1000 people. It did niche corporate banking business, and retail banking. From now on Citigroup will be one of the major forces in the Korean market. And I hope Citi will help change some of the banking practices here, including those relating to HR (human resources). I am waiting for its challenge with a high level of expectation. However, I don't think we need to worry too much about Citi. We have a lot to learn from it, but Citi has a lot to learn from us too. It won't be one-sided.

Will Citi bring top-end risk management practices, and will that be good for the local banking industry?

I myself used to work for Bankers Trust between 1982 and 1989 in Seoul & Tokyo, and, before that, I worked with Paribas for a year. So I can say I am familiar with how global firms develop financial products and manage risk. Obviously risk management technology today is a lot different from that in the 1980s, but I had been the chairman of the risk management committee at Koram Bank for three years, too. [Hwang sat on the board of Koram]. It had good risk management systems and was continuously monitored by Watson Wyatt.

I feel that Woori Bank now has as good a risk management system as Koram. Overall our risk management system is not a serious problem in my view although obviously there is some room for improvement. Risk management is a thing that you need to keep on evolving over the years. But as far as risk management systems go we are fine.

In terms of information technology we are the best in Korea. On September 30 we switched over to completely new banking systems with the help of IBM. We spent over two years on this and in excess of $200 million to set up a new IT infrastructure.

So the systems are not an issue.

The products? We can develop the products overnight. We have as good an option pricing model as Citi has, for example.

The most important thing is human resources. Firms like Citigroup and Goldman Sachs develop their own people with a specialty in mind. You grow up as an expert in credit, or in equity derivatives. In Korea you do almost everything in the bank from branch management to HR. There is little specialization. In Citigroup you are a specialist in something and that is the biggest difference with the local banks.

Your goal is to change this generalist culture at Woori?

That's what I perceive to be my biggest challenge and my most immediate mission.

What stands in your way?

The labour unions. They say they don't like the idea of specialization. Another serious issue is compensation. People get paid more or less the same whatever they do. They don't have specialized jobs and are moved around by the HR department. It is a seniority-based compensation system. If you are a driver and have driven a car for more years, you get paid more.

Is it the case that you decided to replace your staff driver at Woori and outsourced the job to save costs?

That was my own personal protest. He was moved to elsewhere in the bank. I just could not accept the implication that if you drive a car in the bank for 25 years then your skill is two to three times better than a 25 year old driver's, and that consequently you should get paid so much more.

What is your view on the labour unions and their attitude?

The labour union has a legitimate role to protect its members' interests. That's okay. I want staff at Woori to feel reasonably secure working in the bank. Unlike the other aggressive reformers I want to respect and protect jobs. But I also want staff to be productive as well.

I believe in growing revenue rather than just cutting costs. That's how I intend to grow the bottom line. My strategy is about growth. We have only about a 10% market share in Korea and a tiny market share globally. I am willing to pay people as much as possible as long as they make more, i.e., are more productive.

At Samsung Securities you introduced a US investment banking style compensation, didn't you?

Yes, I learned that if I didn't pay as much as Goldman Sachs, I could not hire the guy who worked at Goldman. I could not lure a guy away. He was getting paid on the international level and had Goldman Sachs on his name card, so when I asked him to work for Samsung Securities I needed to pay at least the same.

What was the attitude of the labour unions to the changes you made at Samsung Securities?

At Samsung Securities the labour unions - there were two labour unions - were not against the changes to the compensation scheme. I introduced American-style compensation for the investment banking department, and reduced base salaries. That made them more performance-oriented and in a down market had the benefit that costs were lower, thereby saving jobs.

Here at Woori I am trying to introduce performance-based compensation and job specialization.

Are senior management being incentivized by share options?

Share options are an issue for our shareholder [the Korea Deposit Insurance Corp, or KDIC]. For my part, I will have to negotiate with them. You may find it funny that a foreign-trained banker like myself should just jump into this new role without negotiating compensation. I just wanted to do this job and thought compensation could be sorted out later.

I have already told our major shareholder [KDIC] that the overall incentives of our group firms should be based on EVA (economic value added), and not based on growth in revenues. This bank was rescued by public funds and is built on the peoples' tax money. The most important thing is to return the peoples' money, and the best way to do so is by increasing shareholder value, and increasing the share price. The government can then sell its shares in the market and get its money back. So the most important yardstick for the management is whether shareholder value is being increased. It is my job to make the share price of this company go up, and I want to be compensated on the basis of EVA, which has the closest correlation with the share price.

Is it true that you were personally asked to do this job by Deputy Prime Minister, Lee Hun-jai?

No, I applied for the job at the recommendation of many people around me. When the chairmanship role came up, the government announced it was looking for someone who was in their low 50s, had private sector and international experience, and also a wide range of experience in financial services, and not only in banks. My friends said that it looked like the job description had been written just for me. This job is just for you, they said. To me, it felt like the call of destiny.

Do you view this job as akin to national service?

Almost. I don't get paid as much as I used to be paid at Samsung. In addition, I have many "supervisors" and "helpers" whom I have to deal with, and that can sometimes complicates things a bit.

One thing you can say about Korea is that it takes a long time to persuade people of the need for change, but once convinced, they make changes very fast.

I hope that is the case. But you are right. It takes time to persuade people in this country, like anywhere else.

What you do need to remember is that Woori Bank was once Korea's best bank. The old Hanil and Commerce Banks were the best commercial banks in Korea. People all agree that 10 years ago high school and university graduates would choose to join us over our competitors. These guys are therefore bankers who have pride in their heart. They were devastated by the financial crisis. But they know in their hearts that they want to once again become Korea's number one bank. That's one of the things that persuaded me to come to the bank. The people here have the experience of being number one, and will fight to become number one again.

How does the relationship between Woori and Lehman Brothers work?

It works very well. Lehman is the lead manager for our ADR issue and is our joint venture partner for disposing of and resolving NPLs. It still remains as one of our closest investment bankers.

How does your recent acquisition of LG Investment & Securities fit into your vision?

Banks have the largest nationwide distribution channels and the average person sees banks as having the highest degree of reliability. So you would want to use this vast distribution channel to sell financial products. This is the new banking paradigm.

LG was traditionally the number one or number two securities company and brings to us the benefits of being able to manufacture and sell non-bank financial products. The other synergy is in investment banking. Woori Bank has a pretty strong investment banking team, but they are not as good as Merrill Lynch or Morgan Stanley's investment banking team. So combining that capability with LG Securities will allow us to better serve our many corporate clients. We can go to Samsung Electronics and offer them M&A advisory services together with, for example, Morgan Stanley.

You were running Samsung Securities, and now you are in charge of LG Securities. Isn't that a little bit like the head of Coke taking over at Pepsi? Does it feel a little strange?

No, because there will be a head of "Pepsi", chosen from the market to lead LG Securities. I am going to be an active shareholder, and will discuss with the new CEO the strategy and synergies, but that CEO will run "Pepsi".

Will it be rebranded?

Yes, but we asked for the right to use the LG brand for at least one year. Putting together LG securities with Woori Securities will take some time, but my intention is not to keep the LG brand. LG is a great name in oil and gas and electronics, but I don't necessarily consider it a good brand for financial services. But I need to ask around and see what other people think before the final decision is taken.

Would you agree there are still too many brokers in Korea? Broking commissions have now collapsed to around 12bp.

Retail brokerage is a difficult business. We will try to make money in domestic institutional sales and on the international side. The international equity side has been taken over by global players. Samsung Securities is the only Korean firm in the top 10. It's a pity. It's a bit like an American tourist using his Manhattan driver to drive him around Seoul. That's weird, right? One would think a Seoul-based driver should be better at driving around in Seoul.

And you want to change that?

I hope so, but it will require some investment. You need to have analysts who can call Capital and CalPERS. You need bilingual analysts. They are expensive. But that is where the business is done.

The retail broking business is less attractive. People visit and discuss trading strategies with their brokers and then execute the trades online with a very cheap online broking service.

Institutional investors and foreign fund managers pay for research, unlike retail. Our approach to retail investors must be different. We want to create a culture of long term investing, rather than trading. That means selling asset management products. The job of our brokers will be to make their client rich, and not churning portfolios to make commissions.

Woori and LG have investment trust companies, but we will take an open architecture approach, with a tough quality screening process like global firms have.

Woori obviously has a lot of exposures to companies, and has been involved in corporate restructurings. That must put you in a good position to build a private equity business too?

Absolutely, and with the passage of the new Private Equity Law the prospects are now good. We will participate in attractive private equity funds if they are managed by highly qualified professionals. But we will also run our own private equity funds and invite others to participate. We have a great advantage in the private equity business. We know many companies and have the largest number of corporate clients in Korea. Some of these clients are very good, but some of them are not so good. So we can add value by restructuring the troubled companies and spinning off assets into our domestic private equity funds.

There was talk of a Korean private equity fund being set up to buy 51% of Woori.

It is difficult to mobilize $3 billion of private money with less than 30 investors - the maximum number for a private fund here in Korea - for the sole purpose of buying 51% of Woori. If anyone wants to try, I would be happy to meet and tell him what I am trying to do with Woori. One has to assume it won't be that easy given the amount required. It's also not clear to me what the merit is of being a 51% owner. You have to persuade people they are better off participating in this private equity fund than just buying Woori's stock directly from the market.

We just did a block trade of 5.7% of our shares in the international market, and within four hours we had over $1 billion of orders. We can keep doing these types of block trades and ADRs and sell the shares gradually.

There is a deadline for selling the entire KDIC stake, isn't there?

Yes, the law still exists that says KDIC's stake must be sold by March 31 next year. It looks like it's not going to be easy to keep that deadline, if not impossible. Either the Congress will sit down and postpone the deadline a couple of more years or get rid of the deadline clause altogether.

Your preference would be to sell the bank off slowly, so the government can maximize its return?

You have to consider why the Congress imposed a privatization deadline on Woori Financial Group in the first place. They were sceptical of the government's intentions. They thought the government might try to use the bank as a policy tool and send in government people as management, pumping money into policy directed sectors. They've seen that before and didn't want to see it again. So they said they would give money only if there was a deadline to sell the bank.

Now the feeling has changed. A CEO for Woori has been selected from the market. Everything I do will be with an eye towards the market and communicating with the market. The market will vote by buying or selling our shares. I will talk to the market, let them hear my strategy and build trust in me. My mission is to increase the value of the company.

I have been in this job only six months. I believe hurrying up to sell the shares in the market at whatever price is wrong. I am confident the share price will go up over the years. So it would be best to postpone the privatization schedule, and to make it clear to the market that I have been given mandate to create value in the meantime.

Are you aiming to create a bank that makes a 2% return on assets?

I am looking to create a bank that makes a stable 15-20% return on equity (ROE). I am more interested in that number than ROA. Cost income ratios, and ROA are relevant yardsticks, but I believe foreign investors will be most interested in earnings growth and ROE. The Korean banks have always been volatile, and the managements have tended to give shareholders bad surprises. So I am looking to create a stable business, with a good ROE and no bad surprises.

What is your strategy for the insurance industry?

We are reviewing three strategic options. One is running our own insurance operation, either a green or brown field one. Another is doing a joint venture either with a Korean or an international insurer. A third option is remaining as a pure distributor. I must admit that I am wary of underwriting risk in insurance in Korea. But, all the options are being looked at by my staff, and they will come to me pretty quickly with their recommendations. But I definitely want to be a major force in bancassurance.

Insurance is only a part of the product mix. I want my people to sell five or six products on average to our retail clients. And for the more affluent classes I want them to sell between eight and 10.

Is the worst now over for the consumer debt problem?

It's continuing. But it is not getting worse, and that's the good news. Consumer loans and SME loans are the two problem areas and it is fortunate that it is not getting worse. But it is not getting better either yet. And until the economic recovery becomes obvious, the situation will be more or less the same.

How does the bank cope with this? By charging the right price for loans and setting aside the right reserves. That is what we are doing, and what other banks are doing. We need to make enough spreads and use some of them to set aside for reserves.

Is there a move to set up a central credit bureau?

The CEO's from Kookmin Bank, Samsung Card, LG Card, Seoul Credit Guarantee Corporation and I sat down over breakfast a few months ago and agreed that we should create a credit bureau for us, the users. There are credit rating companies in Korea who are also authorized to be in credit bureau business. But the users are not happy with the depth and width of their services. So we said we should set up a bureau of our own, and finally the government came to share our view. We now have eight of the largest financial institutions joining this credit bureau initiative including Shinhan and Hana Bank. This will change the credit quality of information available in Korea and should be very positive for the financial institutions. The eight founding members have about a 70% market share, so our credit bureau will be fairly comprehensive.

And the SME loans? How much of a problem is that?

The construction industry is beginning to pose some problems. But 60-70% of loans to SMEs are covered by collateral, whether by cash, or land, or the owner's property, or else by guarantees from government institutions. So even if some of the SME loans go delinquent, the eventual losses will not be that much. And we charge higher spreads for less credit-worthy SMEs, so we have price cushions as well as collateral cushions. So I am not too worried about the SME loan book.

Lafarge temporarily closed its cement factory due to lack of demand from the construction industry. That can't be a good sign?

No. We need to wait for the economic recovery and more capital expenditures. But I believe the Korean banks have the muscles to weather the delinquencies in the SME sector. This is a manageable situation.

Are you following your clients into China?

Absolutely. China and Vietnam are the two key places where our clients are investing. However, in my view, you shouldn't have too big a dream when you go to China. You must start with a limited goal of serving your Korean clients. Our clients are not going to be rich Chinese individuals or new emerging Chinese companies. It's the Korean clients that we have known for years we will serve. They are moving to China for cost reasons, or market access reasons, and we are following them to China. It's the same situation in Vietnam.

Some of our clients say Vietnam is better than China. It is farther away from Korea, but, I am told, the workers are very good and highly motivated.

I also view Indonesian retail banking as interesting. We may grow bigger in Indonesia in retail banking.

What's your view on North Korea?

We were chosen as the first bank, and so far the only bank, to have a branch in Kaesong, a special economic zone like Shenzhen. It's only 5km away from the South Korean border. All of the major banks wanted to set up the first South Korean bank branch in North Korea. We got the permission.

But it remains to be seen how successful this zone will be. There are problems with selling products from North Korea to the US and Europe.

The North Korean situation is obviously very unpredictable. I don't think much will change in North Korea in the next 10 years. But if they become more open to economic cooperation, that would be great. Kaesong is a good test of how much capitalism the regime can tolerate.