HSBC's purchase of KEB boosted by FSC statement

Korea's financial regulator announces a review of Lone Star's sale of its KEB stake to HSBC as the July 31 deadline approaches.
South KoreaÆs financial watchdog, the Financial Services Commission (FSC), has announced that it intends to start a regulatory review of the sale of Lone StarÆs controlling stake in Korea Exchange Bank (KEB) to HSBC Holdings this week, ahead of the July 31 deadline for finalising the $6.3 billion deal.

The sale of KoreaÆs fifth biggest bank, which was agreed between HSBC and US private equity firm Lone Star last September, has been delayed as the FSC has withheld approval due to legal disputes over Lone StarÆs initial purchase of the bank in 2003, and amid public anger at the terms of that sale.

But in a statement released on July 25, the FSC said that: ôWe will start reviewing the deal as soon as HSBC submits updated documents for the deal to us.ö However, it added that its "decision of whether to approve the sale will depend on how legal disputes surrounding the deal will be resolvedö.

This marks a change in stance from the FSCÆs earlier position that it would only make a decision after all legal disputes involving Lone StarÆs takeover of KEB have been resolved. The regulator believed that, ôwith the deadline for the (deal) between HSBC and Lone Star nearing àit was necessary to clarify the governmentÆs position on the dealö. The move is widely viewed as positive for HSBCÆs plan to buy the Korean bank.

Nevertheless, the legal issues may take some time to resolve. Lone Star is waiting for a Supreme Court ruling over a KEB share price manipulation case after the Seoul appeal court cleared its Korea head Yoo Hoe-won of the charges. But an initial ruling on whether or not the KEB sale was transacted at an artificially low price, allegedly based on misstated financial figures, isnÆt expected until September, and any decision is likely to be appealed.

HSBC and Lone Star agreed in April to extend the deadline for the deal to July 31, and despite concern among shareholders that the $6.3 billion set aside for the purchase might be better deployed elsewhere, there have been indications, reported in the UK financial press citing head office insiders, that HSBC might extend the deadline once again.

Market analysts also believe an extension is likely because this is considered to be the last chance for HSBC to gain a significant foothold in AsiaÆs fourth largest economy.

A further sign of HSBC's commitment to the deal came earlier last week when HSBC Korea president Simon Cooper reached an agreement with the KEB labour union to retain the identity of KEB and guarantee jobs once the takeover is completed. This followed a statement by KEB's chief executive officer, Richard Wacker, at the beginning of this month that he hoped the deadline would be extended if the deal wasnÆt completed by July 31.

If HSBC succeeds in buying a majority stake in KEB, it will bring an end to the long saga of the circumstances surrounding Lone Star's purchase in 2003. Controversy and prosecutions continue, centred on accusations of stock manipulation and a deflated sale price in a climate still resentful of foreign raiders picking up Korean assets at knock-down prices when the country was reeling from the financial crisis in the late 1990s.

But according to some commentators, such as Kim Geo-sung, chairperson of Transparency International Korea, public opinion is less likely than in the past to be aroused by Lone Star finally making a successful and profitable exit from its KEB holding, as the attention has been diverted to other issues, including President Lee Myung-bakÆs apparently autocratic and divisive style of government. A call to netizens from website bloggers for candle-lit demonstrations around SeoulÆs City Hall would not elicit the same response achieved in recent weeks attacking LeeÆs decision to allow US beef imports, for instance.

KEB has a strong brand, with 350 local branches, offering personal finance and services to high-net-worth-individuals, and has trade and foreign exchange operations. It has strength in depth. Its purchase would give HSBC, which has just 11 Korean branches, a critical mass. KEB is also the only Korean bank with a meaningful international presence, with operations in North America and throughout Asia as it follows its domestic customers overseas.

And the benefits could work both ways û which is always a key consideration when selling the proposal to a sensitive Korean public. If it could have access to HSBCÆs 10,000 offices worldwide, KEB could effectively become KoreaÆs first global bank. The two banks could form a joint-venture for long term partnership and success, and HSBC could even be perceived as a ôKorea-friendlyö investor.

On the other hand, an HSBC takeover of KEB might lead to aggressive customer-base expansion, heating up competition in a banking market where margins are already under pressure. After Citibank bought Koram Bank in February 2004, it offered higher deposit rates to premier clients and lower mortgage rates to attract business, and HSBC might be tempted to do the same. The authorities might prefer that local champion Kookmin Bank purchases KEB instead: due diligence would be shorter, public opinion would be more easily assuaged and, after all, the previous administration had already approved Kookmin as a suitable buyer.
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