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Bidding War – Investors Still have an Appetite for Korea

by Scott B. MacDonald

NEW YORK (KWR) Although Korea’s economic performance over the past year has not been as robust as it has been in the past and the North Korean issue still looms like a dark cloud on the horizon, foreign investors still appear to have a strong interest in buying into this market. This was recently underscored by a bidding war over Korea First Bank. In early January a bid by London-based HSBC was beaten by a $3.3 billion offer from Standard Chartered Plc, another UK-based bank, which makes two-thirds of its earnings in the region, and a strong tradition and operating presence in Asian markets. The winners in this deal are San Francisco-based buy-out firm Newbridge Capital and the South Korean government. Standard Chartered’s determination to win Korea First reflects an understanding that the East Asian nation is increasingly a service driven economy and there will be an attractive market for more sophisticated financial products.

International banks are looking at South Korean market given that there are around $44 billion of annual banking fees generated in the country. That is more than three times the amount generated in Hong Kong, one of Asia’s more developed economies. Along these lines, Korea First is attractive – it holds six percent of the market, has 404 branches spread across the country, and is profitable. The bank has 1.1 million credit cards issued and 2,100 automated cash machines. There are a little over 5,000 employees. The purchase will allow Standard Chartered a platform upon which to compete with Citigroup and HSBC, both of which are already active in this East Asian country.

Clearly Standard Charted felt compelled to act. In 2004, the UK bank sold its 9.8 percent holding in South Korea’s Koram to Citigroup after the U.S. bank beat Standard Chartered’s bid for the entire bank. Koram sold for $3 billion. However, Korea First has solidified Standard Chartered’s position in a key Asian economy. Indeed, after the purchase, South Korea will account for 16 percent of Standard Chartered’s revenue and about 22 percent of its asset base. The expectation is that Korea will soon bypass Hong Kong as the bank’s largest market by revenue, assets and branches. As Standard Chartered’s CEO Mervyn Davies stated: “South Korea’s population of about 48 million people gives the country a very strong banking revenue pool.”

Standard Chartered’s action is being questioned – economic growth in South Korea is slowing to under five percent and many of Korea’s credit card holders have built up high levels of debt. LG Card, the nation’s major credit card company, is struggling to stave off bankruptcy caused by too many deadbeat creditors. In addition, the some are concerned that Korean companies are likely to hold back on spending plans and might borrow less in anticipation that there will be a slow patch in the economy. Yet, Standard Chartered plans to capture 10 percent of the market and sees South Korea as a market where it must be involved.

South Korea is increasingly attractive for international banks. The country has a high level of GDP per capita, is developing a credit card culture (despite LG Card’s problems), and has a sizeable population. Citigroup has Koram and Standard Chatered has Korea First. The next battle over bank ownership could come up in November 2005, when the U.S. firm Lone Star has the option to sell its 51 percent share of Korea Exchange Bank, Korea’s fifth largest lender and worth $5 billion. The challenge for foreign banks is multiple – they have to be sensitive to the local business culture, maintain a high level of transparency and disclosure, and know how to market new products. As seen by the large-scale introduction of business cards and relatively substantial problems with deadbeat borrowers, Korea’s financial markets still offer some challenges. All the same, the purchases of Korean banks and the prices being gained reflect that the country’s banking system has come a long way since the dark days of 1997-98.