Lone star gets green light to sell KEB

Financial Services Commission Chairman Kim Seok-dong, left, presides over a meeting held yesterday at the financial regulator’s headquarters in Yeouido, Seoul. The FSC approved Hana Financial Group’s takeover of the Korea Exchange Bank after months of delay. [YONHAP]

The financial regulator gave the final approval for Hana Financial Group to acquire Korea Exchange Bank (KEB) yesterday, ending a nine-year roller-coaster business story.

With the approval, Hana Financial Group will become the nation’s second largest financial group with total assets of 366.5 trillion won ($326.2 billion), trailing Woori Financial Group’s 372.4 trillion won of assets and ahead of KB Financial Group’s 362.6 trillion won.

The Financial Services Commission announced yesterday that although Lone Star, the majority shareholder of KEB, had a 2 trillion won investment in a golf-related affiliate, PGM Holdings in Japan, it will not label the U.S. investor a nonfinancial investor.

Last October, Lone Star said it would sell its controlling stake in the golf business

“Since PGM is sold at this point, there are no grounds to label Lone Star as a nonfinancial investor,” said Kim Young-dae, deputy governor at the Financial Supervisory Service.

Under current regulations, nonfinancial companies are prohibited from controlling more than 25 percent of the total assets in a bank.

If Lone Star was ruled as a nonfinancial investor, it would have had to unload all but 4 percent of its 51 percent stake in KEB.

Additionally, the financial authority approved the acquisition of KEB by Hana after concluding there were no problems in the group’s fiscal soundness or its ability to fund the acquisition.

“Although Hana Financial Group borrowed money to buy the shares of KEB, we concluded that will not hamper its soundness,” said Lee Sang-che, standing commissioner at the FSC.

Hana has been waiting more than a year since signing the initial contract with Lone Star in November 2010.

The financial regulator’s decision on whether Lone Star was a nonfinancial investor was the final obstacle to the sale.

Controversy has raged over Lone Star since it bought a controlling 51.02 percent stake in the Korean bank in 2003.

It was labeled a foreign vulture investor out for quick profit at the expense of Korea.

The Korean government was also blamed for selling a national financial institution too cheaply.

And Lone Star has indeed done well in Korea.

Lone Star is expected to pocket more than 6 trillion won ($ 5.34 billion) from KEB, which it bought for 2.15 trillion won in 2003.

Last year alone Lone Star pocketed 660 billion won in dividends. Since entering Korea nearly a decade ago, Lone Star raked in more than 1.3 trillion won from dividend payments. In 2007, Lone Star made nearly 1.2 trillion won from offloading a 13 percent stake in KEB.

When adding the 3.92 trillion won it will receive from Hana, the total profit Lone Star has made in Korea edges close to 6.4 trillion won.

Late last year a local court found Lone Star guilty of manipulating stock prices related to the merger of KEB’s card unit in 2003.

Lone Star is not the only foreign private equity fund that has invested in the Korean banks and left with huge profits.

Newbridge Capital doubled its investment after taking control of Korea First Bank for five years and then selling it to Standard Charted in 2005. The Carlyle Group nearly doubled its investment in Hanmi Bank over three years when it sold it to Citibank in 2004.

The financial regulator’s ruling yesterday is expected to spark renewed complaints.

“The approval of the KEB acquisition is the same as announcing the death of Korean law and principles,” said Kim Bo-hyun, a KEB labor union committee member. “[The decision] has nullified all bank laws.”

The banking industry is watching for the impact of the two institutions merging. Competition in the already saturated market will become tougher.

Hana currently has the advantage in household finance, private banking and asset management.

After absorbing KEB, its portfolio will expand to corporate finance, import-export finance and foreign exchange.

The newly merged group will have a competitive edge in its local businesses and also abroad.

Hana Bank has 654 local branches while KEB has 355. The combined number will bring it close to KB Kookmin Bank, which has the largest number of branches in the country, 1,162. Woori and Shinhan Bank both have fewer than 1,000 branches.

Hana will have the opportunity to increase its presence in markets abroad. Hana has only nine branch offices operating outside of Korea while KEB has 27.

Shinhan and Woori have 20 or so branches abroad, while KB Kookmin has 11.

By Lee Ho-jeong [ojlee82@joongang.co.kr]