Relocating the headquarters of Industrial Bank of Korea (024110) out of the capital region could cause economic losses of up to 41 trillion won ($29.5 billion) as lending contracts and funding decisions are delayed, disrupting corporate production, according to a new analysis. The bank itself is projected to lose 2.4 trillion won from lost business opportunities and relocation costs.
The Korean Association for Policy Analysis and Evaluation released the findings on the 17th in a comprehensive report on the ripple effects of moving IBK's headquarters, commissioned by the bank's labor union, financial industry sources said.
The report estimated that relocating the headquarters would result in an annual net loss to the national economy of 5.88 trillion won. That figure already accounts for 366.1 billion won in benefits flowing to the receiving region. Converted to present value, losses over the next 10 years would reach 40.99 trillion won.
The report attributed 93% of the national economic losses to channels linked to small and medium-sized enterprises. IBK handles deposits and loans through branches nationwide, but loans of 30 billion won or more require final approval from headquarters. With 71% of small and medium-sized enterprises located in the capital region, moving the headquarters would delay on-site inspections, collateral appraisals and decision-making, the report said. That in turn could slow the timely disbursement of policy funds and dampen corporate production.
The association estimated annual direct damage at 566.9 billion won from reduced review of large loans and 615.9 billion won from delays in disbursing emergency policy funds. It also cited weaker links between finance and manufacturing, reduced cooperation among executives and smaller volumes of general lending as major loss items. "When the functional distance between headquarters and branches increases, the flow of on-the-ground information declines or is delayed," the report said. "That leads to more conservative credit judgments and reduced lending."
By sector, the report said damage could be concentrated in wholesale and retail, food service and lodging, where small and medium-sized enterprises account for a large share. Wholesale, retail and goods brokerage services and the restaurant and lodging sector would suffer in securing working capital, while research and development businesses would likely scale back facility and R&D investment. Small and medium-sized enterprises make up 85% of wholesale, retail and goods brokerage services and 65% of the R&D sector. "Small and medium-sized enterprises account for only 8% of the automotive sector, but large companies could also be hit through supplier channels," the report said. "Losses would not be confined to companies of a particular size and could spread into a problem for the entire supply chain."
For IBK itself, the report estimated financial losses of up to 2.4 trillion won over 10 years. That is comparable to the bank's annual net profit, which averaged 2.34 trillion won over the past five years.
Specifically, the report projected 600 billion won in relocation costs including a new headquarters building and information technology infrastructure, 1.5 trillion won from the loss of key personnel and business opportunities, and 300 billion won in higher operating expenses. A move out of the capital region would require housing support for the roughly 3,500 employees working at headquarters, along with travel expenses and costs to restructure work processes. "The erosion of expertise and networks that follows the loss of key personnel amounts to a decline in competitiveness," the report said. "If the bank also finds itself at a disadvantage in attracting low-cost deposits, its reliance on high-cost small business finance bonds could deepen."
Dividends are expected to fall by up to 789.6 billion won on a cumulative basis over 10 years, which is why consultation with minority shareholders on the relocation is also needed. Dividends accruing to the government would drop by 541.2 billion won over the same period. The government's stake in IBK, including public institutions, stands at 68.5%. "The positive effects of relocation are abstract, while the negative effects are concrete," said Ryu Jang-hee, head of IBK's labor union. "Given the distinctive nature of the financial industry and of IBK, the urgent task is to thoroughly identify the side effects of relocation."
