Foreign Investors Steer Clear of Korean Banks

Standard Chartered’s woes discourage outsiders

Hong Sung Sook, a Seoul housewife, says she’s getting ready to pull $100,000 of savings out of Standard Chartered’s South Korean unit and put it in a local bank. The reason? Standard Chartered’s efforts to base pay on performance, which it says will improve competitiveness, led workers to stage an extended strike that started on June 27. “The strike was the last straw,” says Hong. “I’ve been a loyal customer for three decades, even though the service was bad and it paid lower interest than other Korean banks.”

The difficulties of London-based Standard Chartered help explain why foreign companies are reluctant to invest in Korea’s financial sector. Six years have passed since any overseas investor has acquired a Korean financial company valued at more than $500 million, according to data compiled by Bloomberg. South Korean President Lee Myung Bak’s latest effort to sell Woori Finance Holdings collapsed last month after the company failed to attract bids from abroad. Woori was created in 2001 as a holding company for banks that taxpayers bailed out following the Asian financial crisis in 1997-98. “It’s clearly negative for foreign investors in any country to see a strike like this,” says James Rooney, chief executive officer of consulting firm Market Force in Seoul.

Then there’s the example of Lone Star Funds, the Dallas buyout firm, which purchased Korea Exchange Bank in 2003. Paul Yoo, the former country head of Lone Star, has been behind bars since July 21 while he, Lone Star, and Korea Exchange Bank are retried on charges of stock price manipulation. Yoo was jailed in February 2008, then acquitted and freed five months later. South Korea’s highest court in March ordered a retrial of the case, which charged him with spreading false rumors about KEB’s separately traded card unit to drive down its stock before Lone Star bought the unit. Yoo declined to comment, as has a Lone Star spokesman.

Civic groups such as Seoul-based SpecWatch Korea have criticized Lone Star and other foreign investors for pursuing an “eat-and-flee” strategy of buying companies and selling them quickly, pocketing big profits. The Loan Star episode has become a symbol of the legal uncertainties and public anger foreign investors may encounter. “The scar Lone Star left here is too deep,” says Yun Chang Hyun, professor of business administration at the University of Seoul. “I don’t think any major foreign capital will try to penetrate the Korean banking industry for a while.”

Other foreign financial companies have also been accused of wrongdoing. Four Deutsche Bank employees and the German lender’s Korean brokerage unit were charged with market manipulation that caused a one-day stock rout on Nov. 11, prosecutors said on Aug. 21. Deutsche Bank denied wrongdoing.

Meanwhile, it has been nearly two months since Financial Supervisory Service Governor Kwon Hyouk Se instructed his agency to seek an early end to the dispute at Standard Chartered. Strikers returned to work on Aug. 29, warning that further stoppages were possible. Forty-two of the bank’s almost 400 branches remain closed. “Trade unions are a factor that foreign investors will consider when they’re deciding on entering Korea,” says Kenny Tang, Hong Kong-based general manager of AMTD Financial Planning. “Foreign investors will be worried.”


    The bottom line: Legal and labor troubles facing foreign companies in Korea may have discouraged others from bidding for Woori Finance Holdings.

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