Lone Star’s Korea Exchange Bank Earnings Fall After Order to Sell Lender

Lone Star Funds’ Korea Exchange Bank (004940) posted a 63 percent drop in third-quarter profit because of increased provisions, a week after the U.S. firm was told it would have to sell its stake in the lender.

Net income declined to 117 billion won ($104 million) from a restated 319.3 billion won a year earlier, the Seoul-based bank said in a filing yesterday. More than two-thirds of workers at KEB, which also said it won’t pay a quarterly dividend, plan to meet today to oppose Lone Star’s proposed $4 billion sale of its stake to Hana Financial Group Inc.

Declining profit indicates operational problems at Korea Exchange Bank, making it imperative for Hana to complete the purchase before the business deteriorates further, said Eugene Investment & Securities Co.’s Kim In. The buyout fund, whose proposed sale has been delayed for a year amid legal wrangling over ownership and stock trading violations, received an advance notice last week that it will be ordered to sell the stake.

“The results are disappointing,” said Kim, an analyst at Seoul-based Eugene Investment who has a “reduce” rating on the lender. “Employees are concentrating on opposing Lone Star’s sale and the fund is also focused on completing the deal rather than the bank’s growth.”

Price Cut

South Korea’s Financial Services Commission said on Oct. 31 that it plans to order Lone Star to sell most of its 51 percent stake in KEB as the Dallas-based firm fails to meet local requirements for holding more than 10 percent of Korean lenders after being convicted for stock-price manipulation last month. The order may be issued anytime from today, according to the advance notice provided on Oct. 31.

Lone Star agreed in November 2010 to sell its holding, then in July this year amid the delays said it would cut the proposed sale price by 6 percent and extended the deadline for the transaction until Nov. 30.

Korea Exchange shares fell 1 percent to 8,180 won at 9:36 a.m. in Seoul, compared with the benchmark Kospi index’s 0.2 percent decline.

The bank set aside 165.1 billion won as loan-loss provisions, more than doubling from 71.9 billion won a year earlier, according to data posted on its website yesterday. In the third quarter of 2010, the bank booked an 87.3 billion won gain from selling a stake in Hynix Semiconductor Inc.

‘Sluggish Economy’

The prospect of slower economic growth may prompt banks including KEB to set aside more cash in case loans sour, said Hong Hun Pio, an analyst at KTB Investment & Securities Co. in Seoul.

“Profit will probably shrink through next year as Korea Exchange’s provisions for corporate loans may climb amid a sluggish economy,” Hong said before the announcement.

South Korea’s gross domestic product expanded 0.7 percent in the third quarter, slowing from 0.9 percent three months earlier, the Bank of Korea said last month. It will be difficult to meet the central bank’s full-year growth forecast of 4.3 percent, Kim Young Bae, a central bank official, said Oct. 27.

The bank’s net interest margin, a key measure of profitability from lending, widened 13 basis points to 2.63 percent in the third quarter compared with 2.5 percent a year earlier. The margin narrowed 9 basis points from the three months ended June. A basis point equals 0.01 percentage point.

About 5,000 union members plan to gather in Seoul to discuss how to keep the lender independent, and ways to collect funds to support staff that may be cut as a result of the sale, Kim Bo Heon, a union spokesman, said by phone yesterday. Branches will operate normally, said Lee Sun Hwan, a bank spokesman.

The workers claim the proposed takeover by Hana threatens jobs and won’t improve Korea Exchange’s competitiveness.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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