KB Financial Group Inc. dropping its bid for ING Groep NV (INGA)’s South Korean life-insurance unit leaves Chairman Euh Yoon Dae’s promise to diversify business unfulfilled as banking in the country becomes less profitable.
KB Financial’s board rejected a plan to buy the ING unit yesterday, deeming it more important to preserve capital as growth slows in Asia’s fourth-largest economy. The decision is a setback to ING’s plan to raise about $2 billion from the asset sale following a 2008 Dutch government bailout.
Banks in South Korea are facing shrinking loan margins and setting aside more cash for bad debts as borrowing by households -- who vote in presidential elections today -- climbs to a record. ING isn’t the only global financial firm looking to scale back in the country, as HSBC Holdings Plc (HSBA) considers ending a 14-year quest to build retail banking operations there.
“This will be a blow to KB’s current management,” said Yoo Sang Ho, a Seoul-based analyst at HI Investment & Securities Co. “KB will have to reconsider all options on how to grow and diversify its business portfolio.”
KB Financial joined the race to buy the ING assets in July as part of Euh’s effort to cut reliance on lending. In the same month, the Seoul-based company dropped a plan to bid for the government’s stake in bigger rival Woori Finance Holdings Co. (053000)
“KB Financial’s board deemed that this is a critical time and it’s important to maintain a high capital-adequacy ratio amid the economic uncertainty,” it said in a statement yesterday. ING said it continues to explore all options for the divestment of the unit.
Shares of KB Financial rose 1.7 percent to 38,200 won yesterday before the announcement. South Korean markets are closed today for the election. ING shares closed down 1.7 percent at 7.12 euros in Amsterdam yesterday, the biggest drop since Nov. 16.
ING had agreed to cut the price for the Korean unit to about 2.3 trillion won ($2.1 billion) from 2.45 trillion won, the Wall Street Journal reported earlier this month.
Chief Executive Officer Jan Hommen is divesting ING’s insurance units after winning more time from European regulators in November to complete the sales and repay state support. Under the agreement, ING has to sell more than half of its Asian insurance and investment-management operations by the end of next year and dispose of the rest by the end of 2016.
“The most negative factor is that KB was the most logical buyer of ING Korea,” said Jan Willem Weidema, an Amsterdam- based analyst at ABN Amro Group NV, who has a buy rating on ING shares. At the same time, “it will be more difficult to meet the European Commission’s deadline.”
ING’s insurance operations in South Korea (KOSPFIN) include ING Life Korea and KB Life Insurance, a joint venture with KB of which ING owns 49 percent. KB’s withdrawal from what would have been its largest takeover comes amid growing concern about the impact of low global interest rates on local insurers.
South Korea’s economy is entering a low-growth and low-rate phase amid weak global expansion, posing “considerable uncertainty” to the insurance business, Kim Seok Dong, head of the Financial Services Commission, said in Seoul on Dec. 5.
Korean voters today will determine whether Park Geun Hye, daughter of the nation’s 1970s military dictator, or Moon Jae In, a former human-rights lawyer, becomes president. The winner will inherit an economy forecast by the central bank to grow 2.4 percent in 2012, the weakest since 2009.
President Lee Myung Bak, whose term ends in February, has unveiled steps to curb lending to households, which swelled to a record 937.5 trillion won in the third quarter, limiting the scope for banks to expand their loan books. London-based HSBC, Europe’s biggest lender by market value, said on Nov. 29 that it is reviewing options for its Korean retail unit.
South Korean banks’ combined profit dropped 11 percent in the third quarter from a year earlier after lenders set aside more bad-debt provisions and central bank interest-rate cuts squeezed loan margins. At KB Financial, net income fell 29 percent to 410 billion won.
Euh, who took office in July 2010 for a three-year term with pledges to cut costs and boost earnings, said in September that KB aims to increase non-banking profit to 30 percent of earnings. Its Kookmin Bank unit accounted for 85 percent of total profit for the nine months through September.
ING entered South Korea’s insurance market in 1989 with a branch office and set up a locally incorporated unit in 1991, according to ING Life Insurance Korea’s website.
The Dutch firm was ordered to sell its global insurance and asset management operations before the end of 2013 after receiving a 10 billion-euro government bailout in 2008. The European Commission said on Nov. 19 that it extended the deadline because of current market conditions.