IBK pre-markets GDR

Korean policy bank launches concurrent GDR and domestic offering to increase freefloat and ease transfer from Kosdaq to the main board.

The Industrial Bank of Korea (IBK) began pre-marketing yesterday (Monday) for a domestic and international offering that could raise up to $600 million.

The government-owned policy bank wants to transfer its listing from the Kosdaq to the main board of the Korea Stock Exchange, but to do so it needs to have a minimum freefloat of 10%. Under the terms of the forthcoming deal, the Export Import Bank of Korea (Kexim) and Korea Investment and Trust Company (KITC) will partially divest their holdings, in the process boosting the bank's freefloat from 5.7% to just over 25%.

Samsung Securities is handling the domestic offering, which is said to comprise a sale of 10%, while ING is handling the GDR, which will comprise a further 10%. At the moment, all the international shares come from KITC in preferred format, while the domestic offering is split equally between KITC and Kexim and comprises all common shares.

Under the current timetable, domestic and international roadshows are scheduled to begin on either December 9 or 10, with pricing scheduled for December 16 or 17. The shares are expected to transfer and begin trading on the KSE on December 24, which means there is likely to be at least a week when the GDR is not fungible with the domestic shares.

This is likely to make the transaction far less appealing to hedge funds and may prompt a larger discount to the stock's spot close. Year-to-date, IBK is up 37.52% and at a share price of Won7,880 is trading on a price to 2003 book valuation of about one times. Given that this is a discount to the entire sector, the leads are likely to try and position the bank as a compelling buy for fundamental investors. Currently, the sector spans Woori on about 1.1 times price to book and Kookmin at 1.5 times.

IBK is an unusual animal given that there are so few listed policy banks in Asia - with the exception of India. It is also more of a hybrid than policy banks given that it has a strong commercial bias in addition to its government status.

Recent shareholding statistics show that the government owns 51% outright all in the form of common stock. KITC owns 15.6%, comprising 25.5 million common shares and 46 million preferred shares, while Kexim owns 15.2% of which 7.3 million are common shares and 62.41 million are preferred shares. Finally, KDB owns 12.5% of which 10.5 million are common shares and 47 million preferred shares.

Because of its policy bank status, IBK has little default risk and therefore a lower cost of funding than most commercial banks. As a result, it was able to record a Net Interest Margin (NIM) of 2.95% at the end of 2002 compared to a sector average of 2.75%.

In the bond markets, the bank has long argued it should trade flat to KDB and Kexim because it has the same liquidity support from the Korean government, which guarantees the bank's solvency through the IBK Act. Investors, however, have always demanded a slight premium.

In the equity markets, the combination of the government's support with the bank's commercial franchise should play well with investors. At the end of 2002, IBK's loan portfolio was split 84.5% SME's, 15% retail and 0.5% large corporates. The nature of the SME sector means that nearly 70% of the bank's loan portfolio falls due in less than one year.

The bank was founded in 1961 to promote the SME sector, but its commercial bias means that it now has the fourth largest branch network in the Republic. At the end of 2002, it had assets of $54 billion, loans of $38 billion and net income of $484 million up from $379 million the previous year.