Bank stocks sour amid disastrous Lime Asset news

Despite record-breaking earnings in 2019, major financial institutions in Korea are struggling to stay afloat as prospects worsen for several troubled funds at Lime Asset Management.

Local analysts estimate banks may have to compensate up to 270 billion won ($227 million) for the losses incurred from Lime Asset Management’s funds.

Stock prices of Korea’s financial holding groups, which were on an uptrend until last year, saw a significant tumble this week.

Shares of Shinhan Financial Group, Korea’s top financial institution both by assets and net profit, dropped to 36,450 won Tuesday, a 1.22 percent decrease from a day earlier, and the company’s lowest stock price in the last three years. The bank had one of its best years in 2019, posting 3.4 trillion won in net profit - a 7.8 percent on-year jump.

Shinhan was closely involved in the Lime Asset crisis, having sold 120.2 billion won of the problematic financial products to retail investors through its affiliate Shinhan Investment. It also sold 169.7 billion won worth of the troubled funds through its flagship banking unit.

Woori Financial Group sold 253.1 billion won worth of Lime’s funds through its bank unit to retail investors. It also saw its share price drop by 1.46 percent to 10,100 won on Tuesday.

Shares of Hana Financial Group and KB Financial Group dropped by 0.15 percent and 1.53 percent, respectively.

Hana Bank sold 79.8 billion won worth of the suspended funds to retail investors. KB Securities sold 28.4 billion won.

Daishin Securities sold 69.1 billion won worth of Lime’s suspended funds to individual investors. Its shares dropped by 1.94 percent on Tuesday, closing at 10,100 won.

Analysts say the downward trend is unlikely to fade anytime soon, as the Lime Asset crisis still has a long way to go before it’s settled. Two of the four troubled funds have not been fully evaluated - meaning the extent of losses to investors is still unknown. And there is also a possibility that the fiasco could develop into a prolonged legal fight.

“The uncertainties at banks are increasing,” said Choi Jung-wook, an analyst at Hana Financial Investment. “Not only is the amount of damage to the investments at stake, but the fact that some retailers might be involved in some kind of financial fraud is also intensifying the uncertainty.”

The banks involved in the case face a total loss of between 100 billion won and 270 billion won, according to a report issued by Hana Financial Investment on Tuesday.

Shinhan Investment signed a total return swap (TRS) agreement with Lime Asset, which allows it to collect its investment ahead of other retail investors. But the firm may opt out of doing so, as it could heighten public criticism of its actions if investigators find that it was involved in fraudulent activities causing the crisis.

If it doesn’t collect, related banks would have to face a total loss of 274.1 billion won, according to the Hana Financial report.

“The losses incurred by the bank industry will differ a lot, depending on Shinhan’s decision on what to do with their TRS agreement,” Choi said. “But it seems uncertainties remain, because the financial watchdog [the Financial Supervisory Service, or FSS] suspects Shinhan and a few other retailers of hiding the flaws of the funds and selling them anyway to unsuspecting investors. A legal battle will make it hard for Shinhan to claim their right of the TRS agreement.”

The FSS is expected to launch an investigation into major sellers including Shinhan Investment, Woori Bank and Hana Bank next month to see if they have been concealing on of the fund’s high risk of loss.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]