Best in South Korea - Kookmin Bank

Kookmin Bank outstrips all domestic rivals with its 1,053 retail branches, 25 private banking centres for high-net-worth (HNW) clients, and 99 corporate banking branches. Added to this, the Seoul-based bank has a core strength in equity-linked products, by far the most popular asset class in South Korea.

"Kookmin has a very well laid out infrastructure internally," says one senior Seoul-based structurer at a foreign bank. "It is very product-orientated and its product review teams are set up in a very methodical and efficient way, strongly geared towards retail. Its deep client base gives it wide access to many clients, all the way from retail through high-net-worth up to private banks."

All new products are approved by Kookmin's product committee, says Young Han Choi, senior executive vice-president in the capital markets and treasury group at the bank. "After analysing the overall marketability of the products, we submit our sales plan to the subcommittee for structured products," he says. "The committee reviews marketability, suitability and feasibility in every respect of the bank's product strategy." For some products, approval from the market risk management committee is also required, adds Choi.

Kookmin is very strong on equity derivatives, notably "one-and-a-half- to two-year products related to certain stocks and indexes", which have traditionally been the most popular type of instruments among investors. Between January 1 and October 31, the bank sold W351 billion ($382 million) of equity-linked deposits (ELDs), chiefly to institutional, HNW and retail investors, and W68.5 billion of equity-linked funds (ELFs).

The bank's biggest-selling ELD of the year had sold W191 billion in 2007 as of November 19. This one-year product references the benchmark Kospi 200 stock index and provides the following payout: if the Kospi 200 has traded at or below the knock-out level (120% of the initial index level), and at expiry has risen less than 5%, 4% a year will be paid. If it has traded at or below the knock-out and has risen above 5%, the payout will be 4% a year + (((index at expiry - initial index)/(initial index) - 5%) x 40%). If the Kospi trades above the knock-out level, the payout will be 4.5%.

Kookmin has also made big strides in selling products linked to foreign exchange and interest rates. The firm sold W1.74 trillion of structured notes - mostly linked to interest-rate derivatives - between January and October, mostly to institutional investors and also to HNW clients. This is already well up on the figure of W1.42 trillion for the whole of 2006.

On top of simple callable structures, the bank has offered more complex products such as constant maturity swap spread range accruals and power spreads. Power spread refers to the spread between the three-month Korean treasury bond rate and the three-month certificate of deposit rate. The bank issued the first of this type of note in October 2006.

In March 2007, Kookmin launched interest rate swap-linked (IRS-linked) loans, and had sold W125 billion of these products as of mid-November. An IRS-linked loan is a combination of a straight loan and a swap to hedge the interest rate risk inherent in a floating-rate loan. Kookmin was among the first to offer such instruments to individual customers in South Korea, and is preparing to launch interest rate option-linked loans.

Kookmin is also well set to capitalise on the commodities boom, as soon as the government allows banks to sell commodity derivatives products to investors. It struck a partnership with derivatives structuring specialist Societe Generale in December 2006 to sell commodity derivatives products to corporate clients as a first step. Korean banks can only sell derivatives for hedging purposes, but many expect that restriction to be lifted.

The bank has also put a big emphasis on educating its customers, in regard to both describing how products work and explaining the benefits of using different types of product and asset class for diversification, says one head of investments at a Seoul-based securities company. "We are offering investment seminars in conjunction with the product issuers," says Kookmin's Choi. "We invited high-net-worth clients to the seminars 35 times across our branch network this year.

Kookmin is also planning to stay ahead of its rivals by introducing a new platform in 2009 - CMBS (capital market business system) - to cover all functions related to its derivatives business. "It will enable us to sell all derivatives and structured products systematically," says Choi. "Our branch officers will also use it to get marketing information, record transactions and communicate with their clients."

Part of the technology revamp will include the implementation of French software supplier Sophis's Risque trading and risk management system, for which it signed up earlier this year. "By installing Sophis," says Choi, "we expect to shorten the time needed to launch new products." This can only strengthen Kookmin's position.