Korean banks: no joy in sight

As long as banks continue to be pressured into bailouts, investors should avoid the sector.

Euphoria now surrounds the Korean banking sector following the announcement that Kookmin and Housing Commercial Bank HCB have reached a successful merger agreement following marathon talks. This euphoria will probably be short-lived, however, because the sector is unlikely to enjoy any recovery in basic operating circumstances. The current situation facing the Korean banks as a whole is depressing, with many of the banks having to face the prospect of increasing levels of non-performing loans to faltering chaebols such as Hyundai, Daewoo and Ssangyong.

The Korean government promoted bank mergers in the apparent belief that in terms of assets, Korean banks were simply too small to compete. Being significant in asset scale can have...

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