Kookmin's prices tight, prices well

In what represents the largest non-privatization offering from Korea, Kookmin Bank secures the tightest discount to spot for a domestic bank DR.

In some style and significantly in-the-money, Goldman Sachs Private Equity monetized a portion of its 9.72% stake in Kookmin Bank at New York's close on Tuesday. Pre-greenshoe, the firm raised $633.6 million from the sale of a 3.46% stake that should significantly boost the firm's Asian P&L in a difficult year for investment banking revenues.

From both the issuer and syndicate's perspective, the execution and pricing of the deal were considered a great success, with Kookmin achieving the tightest discount on record for a Korean bank DR. Prior to the launch of the deal, Goldman's stake was valued at $1.5 billion, a 200% increase from its $500 million purchase price in the summer of 1999, when the private equity arm acquired 20.449 million shares for about $300 million and $200 million worth of convertible stock due 2005, equivalent to nine million shares on full conversion.

Kookmin represents the only Korean bank to be listed on the New York Stock Exchange and prior to its current deal had a 32.6 million ADR float outstanding ($1.58 billion) through H&C Bank, with which it merged late last year.

Having filed to sell 11 million ADRs (with one unit equivalent to one share), the offering amount was increased to 13.2 million ADRs (the maximum allowed by the US SEC under the filing), with books closing three times oversubscribed at the increased level. Pricing at $48 per ADR represented a 1% discount to the existing ADR's $48.49 close and a 1.8% discount to the stock's Won60,100 close in Korea. At this level, it beat KorAm Bank, which had previously held the record with a $200 GDR, which priced at a 2.99% discount to spot in late April.

Pricing was also all the more striking for the fact that the stock has risen steadily this year, closing Thursday up 20.48% year-to-date, versus an 11.92% increase in the Kospi, which closed Wednesday 4.08% down on the day at 776.37.

Observers report the participation of about 100 accounts, with a geographical split, which saw 50% of paper placed in the US, 40% in Europe and 10% in Asia. Credit Suisse First Boston, ING Groep and Salomon Smith Barney were co-leads and there is also a 15% greenshoe, which could ultimately reduce Goldman's stake to 5.3%.

About 70% of the book comprised new investors and most noticeable was said to be the participation of global funds seeking to increase their weighting in the Korean market and particularly Kookmin, which has a hugely liquid free float of 76%, trades up to $70 million to $80 million a day and is a favourite holding of foreign investors who own 71.9% of the issued share capital. The government also owns about 10%.

"This was never a deal that any sane investor would bet against," one Korean expert comments. "Kookmin is a great bank, with a great domestic franchise and fantastic technicals. Moreover, the sell-down involved a reasonable vendor that was always likely to price the deal at a sensible level based on the advice of its sister company."

And a second adds, "From an investor's perspective, this deal offers upside to a performing market and through an extremely liquid stock which appears to be trading on a relatively cheap valuation. The downside was minimal."

Indeed, despite its strong performance so far this year, virtually every single analyst still has a buy recommendation on the stock. Some argue that as Kookmin has only existed since the end of last year, its status as Asia's largest domestic bank by market capitalization (discounting the international behemoth HSBC) is not widely appreciated by the overall market and is certainly not reflected in its valuation.

Although the bank trades at a premium to the domestic banking sector on both a p/e and price to book basis, it trades at a discount to both the Korean and Asian market average. And as Nomura analyst Brian Hunsaker says, "Given its size, market share and potential to reduce costs, Kookmin should be trading at a much higher premium to the Korean banking sector."

With a market capitalization of $15.6 billion, Kookmin is bigger than all five of its nearest domestic rivals put together. Analysts say that it is currently trading at 2.14 times price to book, compared to 1.66 times for Shinhan, 1.59 times for Cho Hung, 1.45 times for KorAm, 1.31 times for Hana and 0.96 times for KEB.

On a p/e basis, the bank stands at 8.7 times 2002 earnings, compared to a 11.4 times average for the Korean market. By comparison Hong Kong-listed Hang Seng Bank is currently trading at 17 times against an 18.1 times market average, while DBS Bank is at 17.5 times compared to a 19.9 times average.

According to one banker, consensus forecast EPS growth for the next three years is 73.5% compared to 3.9% for a bank like Hang Seng. Some local analysts, however, doubt whether such figures are achievable. Hunsaker, for example, argues that the credit boom, which has fuelled growth during 2002, should slow markedly from 2003 onwards.

"But" he adds, "What Kookmin has in its favour is a huge potential to realise cost savings. Since it has such a large share of the domestic market (85% of residential mortgages and 35% of retail deposits), it's also well positioned to take advantage of a boom in wealth management. We estimate that this sector could grow by up to 200% over the next couple of years."

The bank also recently reported that first quarter net profit rose 43% to Won672 billion ($511 million) compared to Won469 billion for the same period last year, with net interest margins also up 14.5% to 3.14%

Moving forward, Goldman is locked up for 150 days post offering, but stated during roadshows that it intends to maintain a long-term investment in the bank as it believes there is still plenty of upside in the share price. ING Groep, which owns roughly 4% via its legacy shareholding in H&CB, has also indicated that it would like to increase its current stake.