StanChart may want to be gone for good from Korea

A wave of consolidation sweeping South Korea's banking industry is fuelling speculation that Standard Chartered may want to take the opportunity to exit Asia's fourth-largest economy and recoup its record USD 3.3 billion investment.

When foreign banks rushed into the Korean market in the wake of the Asian financial crisis, they were widely expected to take a bigger slice of the country's profitable wealth management businesses and high-end retail banking sector from top local banks such as KB Financial Group and Shinhan Financial Group.

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But StanChart's Korean unit, SC First Bank Korea, has never been a major threat to savvy homegrown banks in the competitive consumer lending or credit card segments.

SC First Bank's limp profit growth, recent restructuring and first dividend payout has further stoked persistent market talk that the London-based bank may consider an exit from the saturated Korean market.

"I don't think they read Koreans' mind well and if you ask whether they have been successful here, I think it's questionable," said a local analyst, who declined to be named because of the sensitivity of the issue.

"That is leading some to speculate that they may sell out of Korea."

StanChart, which last year launched a new branding slogan -- "Here for good" -- declined to comment whether it plans to sell off its Korean assets.

When its chief executive Peter Sands visited Seoul in early April, he said the bank has no plans to exit Korea and was completely committed to the country. Its Korean head Richard Hill also reiterated the bank would continue to invest and grow in Korea.

Despite those denials, rumours that emerging markets-focused StanChart is seeking to sell the stake have refused to die.

Good fit

Analysts and bankers say SC First Bank could be a good fit for state-run KDB Financial Group, which has little retail lending base and heavily skewed to corporate lending.

Hana Financial Group, which is trying to finalise its USD 4.3 billion deal to buy Korea Exchange Bank from US buyout fund Lone Star, is another that could be interested.

"If Hana fails to clinch the KEB deal, it may turn its eyes to SC First. And KDB cannot be ruled out too," said Ahn Soon-kwon, a research fellow at Korea Economic Research Institute.

With a book value of around USD 3.7 billion, SC First Bank could fetch more than USD 4 billion based on Hana's offer for KEB at around 1.1 times book. That would mean a solid if not spectacular return on StanChart's original investment.

"The business (SC First Bank) is not doing well at all and it's a good sized asset to sell off," said a senior banker at a rival lender in Korea, who also declined to be identified due to the sensitivity of the matter.

SC First Bank is the sixth largest bank among the seven commercial banks in Korea, with assets a quarter of the average of the top three. It has a network of 408 branches but recently said it plans to close less profitable 27 outlets amid growth in Internet and mobile banking services.

A sale to another offshore based bank appears unlikely.

Foreign appetite for Korean banking assets has waned in recent years, as high household debt and cutthroat competition weakened the industry's growth prospects.

Hana lost its top shareholder, Singapore state investor Temasek Holdings in October, and Goldman Sachs also reduced its stake in the group with USD 299 million stake sale last month.

"It's a difficult market for foreign banks. There are a lot of banks up for sale in Korea and there isn't a long list of people dying to get in," said one banker in Hong Kong.

In addition to Hana's KEB purchase, Seoul is looking to sell its USD 6 billion stake in Woori this year.

BYE FOR GOOD?

A sale of its Korean operation would be a U-turn for StanChart, which generates more than four-fifths of its profits in Asia and picked Korea for its biggest acquisition to fuel its Asia expansion.

But organic profit growth at SC First Bank has been lacklustre and lagged its Korean rivals.

It refocused asset portfolios heavily to consumer lending but a limited network and failure to offer differentiated products meant that it struggled against its peers, which enjoyed healthy profit growth thanks to a boom in lending to the export-focused corporate sector.

SC First Bank's operating profit fell by 24% last year, compared with a 36% rise at Shinhan Bank and 35% growth at Woori Bank, part of Woori Finance Holdings.

"Unless it further balances its income sources, (SC First Bank) won't be able to break out of its low profit structure. Pursuing stability too much never helps here when its rivals are actively going out and fighting to attract more customers," said Ahn.

Consumer lending accounted for more than 60% of SC First Bank's loan book as of the end of 2010, sharply higher than Shinhan's 47% and Woori's 42%.

Korea is the second biggest consumer banking market for StanChart, but is the fourth-biggest market by profits after India, Hong Kong and Singapore.

StanChart paid USD 3.3 billion for the full-ownership of Korea First Bank in 2005, around 1.87 times net asset value of the Korean bank. It has since grown its emerging market profile, with strong performances in India, Hong Kong and the Middle East helping drive record profits in the first quarter.