Bidding wars for capital companies are heating up in South Korea's financial sector. With limited room for growth in household lending and mounting constraints on profit models centered on deposit-to-loan margins, capital firms that can expand into auto finance, leasing and installment finance, and corporate finance are emerging as a key route into the non-bank credit market.

As of July 1, KakaoBank announced it is pushing to acquire 100 percent of Mastern Capital. Hanwha Life has been selected as the preferred bidder in the takeover of Acuon Capital. Sh Suhyup Bank is also reviewing options such as acquiring a capital firm as part of efforts to expand its non-bank portfolio.

LICENSE VALUE STANDS OUT, EASING PF BURDEN ALSO A FACTOR

The biggest reason capital companies are drawing attention is their specialized credit finance business licenses. Capital firms do not take deposits, but they can conduct a range of lending businesses including installment finance, equipment leasing, leases, corporate loans and investment finance. Financial firms see them as a relatively efficient way to expand because they can extend into asset-based finance that banks struggle to handle directly, financing for small and midsize corporations, and some areas of investment finance.

Easing burdens from real estate project financing, or PF, is also driving a shift in perceptions of capital companies.

In the past, capital firms were seen as less attractive because of concerns about bad real estate PF loans. More recently, related exposure has declined and the share of higher-risk bridge loans has also fallen, creating a sense that some industry risk has eased. As PF risk declines, the value of specialized credit finance licenses is again coming into focus.

KAKAOBANK, SUHYUP BANK, HANWHA LIFE TAKE DIFFERENT APPROACHES

KakaoBank's push to buy Mastern Capital is an example of the financial sector's move to enter the non-bank credit market through capital firms. KakaoBank plans to secure the license and operating foundation needed to enter the capital business through the acquisition. It would be the first step for KakaoBank, which has focused since its launch on retail banking and non-face-to-face financial services, to broaden into the non-bank credit market.

KakaoBank said it plans to enter the auto finance market starting with installment finance once the acquisition process is completed. It plans to work with external partners such as auto distribution platforms to offer non-face-to-face auto installment finance services, and later expand into leasing and rental. Over the medium to long term, it plans to widen its credit portfolio into corporate finance and investment finance for sole proprietors and small and midsize corporations.

Sh Suhyup Bank is also looking at potential capital-firm assets as part of expanding its non-bank business. The bank acquired an asset management company last year to establish the foundation for its first non-bank subsidiary. With heavy dependence on bank earnings still in place, the need to secure additional non-bank affiliates such as a capital firm or a securities company continues to be discussed in the financial sector.

For Sh Suhyup Bank, the need to build a non-bank portfolio above a certain level to pursue a long-term conversion into a financial holding company is also cited as a reason for considering a capital company. Still, a conversion would require institutional steps such as revisions to the Fisheries Cooperatives Act, leaving it as a medium- to long-term task.

Sh Suhyup Bank is currently understood to be continuously monitoring whether assets in an appropriate price range come to market, rather than injecting large funds to acquire a capital company. The mood is to review targets based on capital capacity and business synergy rather than pursuing aggressive scale expansion.

Interest in capital firms is not limited to the banking sector. Large financial groups seeking to expand synergies with existing affiliates in insurance and securities, and to broaden their lending business footprint, also attach strategic significance to acquiring capital companies.

In the recent takeover of Acuon Capital, Hanwha Life was selected as the preferred bidder, drawing market attention. Acuon Capital holds a stake in Acuon Savings Bank, meaning that if the acquisition is completed it could build a financial portfolio spanning capital and savings banking alongside insurance and securities. Capital firms are being viewed as a non-bank lending pillar for financial groups rather than simply auto installment finance companies.

FIERCE COMPETITION AMID LIMITED ASSETS, POST-DEAL RISK MANAGEMENT KEY

Financial firms are approaching capital companies with slightly different calculations. Banks view them as a route to secure non-bank income sources, while financial groups see them as strategic assets to expand synergies with existing affiliates. There is also room to improve sales efficiency and uncover new demand by applying customer bases, platforms and data analytics capabilities to the capital business.

Still, acquiring a capital company does not automatically translate into stable profit growth. Capital firms are sensitive to market interest rates and funding conditions, and in an economic slowdown the risk of borrower defaults can rise quickly. Even if PF burdens have eased, asset soundness at some small and midsize firms still requires scrutiny. The outcome of acquisition competition is expected to hinge on capital strengthening, risk management and the ability to create synergies with existing businesses after securing licenses.

A financial industry official said, "When banks expand non-bank businesses, the areas they can first consider are insurance and securities, but if entry is not easy, a realistic alternative is a capital company." The official added, "Capital companies can perform some investment banking functions, including corporate finance and investment finance, which is an aspect financial firms tend to prefer."

The official said, "That is also why financial firms' interest in capital companies on the market is so intense these days." The official added, "Assets that can be acquired are limited, while demand is high, so competition and a war of nerves are also intensifying."

The official said, "After an acquisition, it will become more important how to set the medium- to long-term business direction and how to build a soundness and risk management system."