Hana Financial Group acquires KEB, some questions remain

Last week, the big-ticket news in the local finance industry was undoubtedly Hana Financial Group striking a final deal to acquire Korea Exchange Bank at a discounted price from U.S. private equity fund Lone Star.

Many analysts said that Hana Financial Group joining forces with the nation’s fifth-largest bank will strengthen the group’s fundamentals by each providing benefits in retail or corporate banking respectively.

However, some analysts noted that remaining problems need to be solved before Hana Financial could deliver on the promise of stronger fundamentals. This includes solving continued losses in KEB’s project financing division and overcoming the intractability of KEB’s employee union

In the final deal, Hana Financial signed on Saturday to acquire Lone Star’s 51.02 percent controlling stake in KEB, more than 550 billion won ($488 million) was docked off KEB’s price from the previous standing deal between the No. 4 banking group and the buyout fund.

“We did our best,” said Kim, during Sunday’s press conference on the details of the deal. “Even looking at overseas precedents, I’ve never seen a bank being sold for less than its book value ... seen from the low default rate, KEB’s assets are fine - and we paid less than one times [the book value]. Plus, we are going to get back about 400 billion won in profits next year.”

Not only does the final deal slash the price of KEB shares from 13,390 won to 11,900 won apiece, but the clauses outlining a late penalty of 100 won per share every month since Oct. 1 as well as dividend payouts to Lone Star were deleted, leading to a total of 1,690 won per share discounted or 556.1 billion won in total docked from the previous deal reached in November and renegotiated in July.

Not only did the twice-foiled attempt from Lone Star to sell KEB since it acquired the bank in 2003 succeed this time, but Kim’s efforts to persuade Lone Star to liquidate KEB shares at a discount and exit Korea lessened the blow of what could have been a massive management premium paid to the buyout fund.

Many analysts are viewing this as a positive development for Hana Financial Group’s fundamentals. Brokerages such as Hanwha Securities, NH Investment & Securities and Daishin Securities have all revised upward their target prices for Hana Financial Group shares from a maximum of 46,200 won per share to a maximum of 60,000 won.

Moreover, the discount price of KEB shares has given Hana Financial some leftover funds that analysts now see as opening many possibilities.

“Now that the price of acquiring Lone Star’s stake is lower, Hana Financial has the power to buy more KEB shares,” said Kim Eun-gap, sector analyst at NH Investment & Securities. “If the leftover funds are used to buy more KEB shares, it can effectively raise Hana Financial’s return on equity (ROE).”

“If the leftover funds are used in expanding bank loans, a small increase in interest profits are expected,” said Choi Jeong-wook, sector analyst at Daishin Securities. “It can also be used to purchase additional KEB shares.”

However, analysts said that the expectation of stronger fundamentals have already been reflected in Hana Financial’s stock prices. In fact, Hana Financial Group’s stock prices have fallen since Friday Dec. 2, when news of the finalized deal and share price discount hit the airwaves - and stood at 40,650 won at yesterday’s closing, a 3 percent drop from its recent peak of 42,050 won on Dec. 1.

By Lee Jung-yoon [joyce@joongang.co.kr]