Industrial Bank of Korea (IBK) raised $298.4 million after pricing some 26.2 million global depository receipts at 11,390 won ($10.94), a 4.45% discount to the closing price on April 11.
The deal was initially set to price on Tuesday but volatile markets encouraged bankers to do an accelerated bookbuild late Friday night. “Markets were coming down, so books opened and closed [quickly] after markets closed,” one banker close to the deal told FinanceAsia.
Books were fully covered 15 minutes after opening, with Citi, Goldman Sachs and UBS leading the deal.
More than 40 investors participated in the deal, the majority of them global hedge funds, although there was also some decent interest from long-only institutional investors. The 10 biggest investors accounted for 85% of the GDRs, which will list in Luxembourg.
The deal was timed to take advantage of renewed investor interest in South Korean equities as institutions rotate back into select emerging markets following a sell-off for most of last year.
The poor performance of Japanese shares – the Nikkei 225 is down 14% so far this year and has fallen 6% in the past two weeks – has led to an institutional shift out of Japan and into other North Asian markets, namely Taiwan but, especially, South Korea. The country’s Kospi index is up 3% year-to-date, surpassing the 2,000 mark on April 10.
Selective interest in South Korea
IBK’s decent performance recently was a key selling point for investors. It is up about 5% so far this year, partially as a result of being re-designated a public institution in January.
Analysts argue stricter reporting requirements will push IBK to be more cost-conscious, which should improve its net margins and earnings. But some have also questioned how much upside there is left for the shares and highlighted the potential impact of a future government divestment. The South Korean government in November sold a 4.2% stake in IBK, netting 264.94 billion won ($250 million). It had initially said that it wanted to offload an 18.1% stake last year and has stated its intention to reduce its ownership to 50% plus one share.
The stock overhang concerns, though, failed to undermine the GDR sale. “It all moved quickly. People were waiting for this trade," the banker said. The roadshow launched three days before books closed.
IBK is currently trading at 0.51 times book value, a discount to other comparable lenders, which also likely aided in the GDR sale.
Although interest in South Korean equities is high, a number of local financials have not performed well.
KB Financial Group, the holding company for Kookmin Bank and the largest bank in South Korea by asset value, has a book value of 0.8 times book value, according to Bloomberg. Its shares are down 11% for the year-to-date, which analysts say is a direct result of the company being hit by a domestic data theft scandal, prompting the regulator to impose a three-month ban in mid-February on some of the group’s credit card operations.
Hana Financial Group is also down 11% YTD and trading at 0.79 times book. It’s another victim of company-specific issues, involving a fraudulent loan scandal and prospective sanctions against Hana’s CEO for ignoring procedures when he was head of Hana Capital, according to media reports.
Shinhan Financial Group is a bright spot in the sector – shares are up 0.12% YTD and the bank is currently trading on a book value of 1.12 times book value, according to Bloomberg.
IBK’s story was clearly a selling point for hedge funds and institutional investors – the bank’s focus on small- to medium-size enterprises separates it from its competition. It has also expanded recently to Hanoi and Wuhan in China and has a representative office in New Delhi, plus memorandums of understanding with JP Morgan, Unicredit and State Bank of India to allow South Korean SMEs to obtain credit, which is backed by IBK, from their respective local institutions.
But SMEs – and the banks that lend to them – have a number of risks. SMEs are extremely sensitive to fluctuations in the South Korean economy. They also tend to have less reliable reporting financial information than larger corporations.
In addition, IBK has significant exposure to a number of industries that have been under pressure since 2008, namely construction and real estate.