SG Korea on aggressive institutional buildout

Société Générale’s Asia chief is optimistic about expanding the French bank’s institutional business in Korea, after it received a licence last week allowing it to deal in equities and derivatives.

Hikaru Ogata, Asia-Pacific CEO of SG’s corporate and investment banking arm, discussed the thrust of his plans with AsianInvestor.

The financial investment business licence, approved by Korea’s Financial Services Commission last week, means SG can offer Korean institutions its full suite of trading and structuring services.

The bank can now deal in securities, equity underlying exchange-traded derivatives and over-the-counter derivatives globally through a locally incorporated entity called SG Securities Korea.

The group had previously relied on reverse solicitation (i.e. being approached by clients). Before receiving this new licence, it held two Korean brokerage licences, both of which will be transferred to the new entity.

The firm has spent the past year staffing up at SG Securities Korea, and year-to-date has added over 40 employees, bringing total headcount to 67 across trading, distribution, operations and IT.

Inhwan Oh, CEO of SG Securities Korea, will oversee the new business, having joined the firm in 2010 from Bank of America Merrill Lynch.

The licence cost SG W200 billion ($178 million) to obtain, and marks an milestone that Ogata has been working towards since he joined from BNP Paribas.

“I laid this out as a key priority when I joined [the firm] three years ago,” he says, adding that the opportunities in Korea, among Asia’s asset-richest countries, were too large to ignore.

Sales staff in Seoul have already begun to meet with pensions, sovereign wealth funds and insurance companies to pitch their offerings and services, as Korean investors – like their global counterparts – seek to diversify away from fixed income in the current low-yield environment.

What sets Korea apart from global investors, Ogata argues, is the amount of cash they’re sitting on. “One thing that’s clear from all of the success Korea has enjoyed – since the Asian crisis [is that] it is a very cash-rich country,” he says.

The country’s central bank reserves are the eighth largest in the world and the fourth largest in Asia, while Korea’s National Pension Service is one of the largest retirement funds in the world. The country also boasts Asia’s third largest insurance market, he adds. “The list goes on,” Ogata says.

He notes that fixed income doesn’t provide adequate returns any more – government bonds in Korea, for example, are only yielding 3%, compared with five years ago, when interest rates were 7%, and from 10 years ago, when they were in the low-double digits.

“Put all of that together and, in the context of lower interest rates, there is a real search right now for higher returns in Korea,” Ogata says.

Korean investors are also more keen to diversify than in the past. “We’ve seen a tremendous need to diversify,” he says. “Look at investments in the past – they had much more of a domestic focus. But if stock markets in Korea didn’t do well, [then returns suffered].”

NPS is one institution re-evaluating its portfolio. After coming under pressure due to lacklustre returns in 2012 compared with its peers, new NPS chairman and CEO Choi Kwang is expected to shift the $360 billion retirement fund’s portfolio and set it on an aggressive allocation plan.

And just last week NPS started reviewing its list of domestic and global custodians. It will begin posting request-for-proposals on its website this month for custody mandates across a variety of asset classes, including equities, fixed income and alternatives.

This will include increasing domestic and global equity exposure, as well as alternative investments.

While Ogata declined to say explicitly whether SG is targeting NPS for its securities business, he says it would be hard to talk about investors in Korea and leave off one of the “world’s largest pension funds”.

Other potential target clients he cited include central bank the Bank of Korea and sovereign wealth fund Korea Investment Corporation.