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(News Focus) Hana's KEB takeover heralds shakeup of Korean banking sector

All Headlines 21:41 November 25, 2010

SEOUL, Nov. 25 (Yonhap) -- South Korea's banking industry is set to face a big change in its landscape as Hana Financial Group, the country's fourth-largest financial service firm, takes over its smaller rival Korea Exchange Bank (KEB), experts say.

Hana, if the takeover deal goes well, will become one of the top three financial services companies in South Korea with assets of 316 trillion won (US$275 billion), trailing Woori Finance Holdings Co. with 332 trillion won and KB Financial Group with 330 trillion won.

"The deal could result in the reshaping of the country's financial landscape," said Lee Byung-yoon, a researcher at the Korea Institute of Finance. "Currently, the banking sector is dominated by three big players. But with Hana's KEB takeover, the players will face severe competition to survive."

In addition to Hana's acquisition of Korea Exchange, Woori Finance, the country's largest banking group, is set to be privatized, the last major lender that received a state bailout fund.

The privatization could accelerate moves to reshape the country's banking segment, analysts said.

The South Korean government took control of Woori Finance when the Asian financial crisis hit in 1997 as it sought to bail out troubled banks with massive amounts of taxpayers' money.

The government aims to pick a preferred bidder in the first quarter of 2011 and complete the sale within the first half of next year.

In the past 10 years, the country's banking industry has witnessed a flurry of mergers and acquisitions.

Following the 1997 Asian financial crisis, most banks in South Korea were striving to survive rather than to grow. But with an economic recovery underway and competition intensifying, banks have been seeking to expand again.

At present, the banking sector is still fragmented with 18 banks, but the largest four banks control more than half of the loan market.

Hana's takeover deal also comes as South Korean lenders seek to expand into lucrative non-banking financial services, including wealth management, brokerage and insurance.

Domestic lenders, facing a saturated market, have sought to find new growth engines but have yet to make significant headway.

"The major players would strive to survive by finding new businesses or niche markets as there are no major outstanding players," said Seo Byung-soo, an analyst at Prudential Investment & Securities. "That could boost systemic risk in the sector as a whole," he said.

Seo said Hana's deal would tighten the competitive landscape.

"That won't be a good thing for banks' profitability," he said.

In the meantime, Hana Financial shares would get a boost from the KEB takeover, analysts said.

Hana Financial has grown through a series of mergers by acquiring Seoul Bank for 1.15 trillion won in 2002, its largest acquisition following two more mergers after the 1997-98 Asian financial crisis.

"In the financial business, securing a competitive size is important, and this deal will help Hana obtain the scale," said Lee at the Korea Institute of Finance.

Kim Seung-yu, chairman and chief executive officer of Hana Financial, has been seeking an acquisition to challenge bigger local competitors.

"Hana Financial shares have been undervalued because of a weak customer base and profitability compared with bigger rivals," said Shim Kyu-sun, an analyst at Hi Investment & Securities Co. "But the takeover of Korea Exchange will help shake off such a weakness."


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