Park Scraps Privatization Plan for Korea Development Bank

South Korea scrapped a five-year-old proposal to sell Korea Development Bank, a signal President Park Geun Hye will use the nation’s biggest policy lender to channel more funds to companies.

The government proposes merging the lender with Korea Finance Corp. by July 2014 while selling the brokerage unit and other assets, the Financial Services Commission said in a statement today. The regulator will submit a revised version of the KDB Act, a mandate to break up holding company KDB Financial Group Inc., to parliament this year, it said.

Park, who came to power in February, plans to use policy banks to spur economic growth amid tight liquidity and limited investor demand for banking assets. South Korea in June began its fourth attempt to sell Woori Finance Holdings Co. -- this time by breaking it into pieces -- weeks before HSBC Holdings Plc said it would wind down some of its local operations after failing to find a buyer.

“Park’s administration is taking the right steps in reversing the previous government’s plan for KDB’s privatization,” said Michael Na, a Seoul-based analyst at Nomura Holdings Inc. “By letting policy banks and commercial banks fulfill their separate functions, Park will be able to boost overseas investors’ trust in South Korean markets.”

Unit Sales

The timing and details for selling KDB units Daewoo Securities Co., KDB Asset Management Co., KDB Capital Corp. and KDB Life Insurance Co. are yet to be determined, the FSC said.

The KDB Act currently requires the government to begin selling shares of Korea Development Bank by May 2014. South Korea is still open to considering an initial public offering for the lender as long as it remains a controlling shareholder to maintain a policy financing focus, the FSC said.

“Since the 2008 global financial crisis, policy financing becomes even more important for restructuring companies and acting as a safety valve in the market,” FSC Secretary-General Koh Seung Beom told reporters today. Since the previous government laid out the privatization plans in June 2008, the market for selling the assets has deteriorated due to the global financial crisis and Europe’s debt woes, Koh said.

South Korea plans to retain more than a 50 percent stake in Industrial Bank of Korea, the FSC said. The government owns 72 percent of the largest lender to the country’s small and midsized companies, according to data compiled by Bloomberg.

Lee’s Strategy

Previous President Lee Myung Bak sought to trim the fiscal deficit by paring stakes in assets including KDB and Industrial Bank, as well as Incheon International Airport Corp.

The regulator said today that it will strengthen financing for the nation’s ship industry by providing guarantees on debt sold by ship owners.

STX Pan Ocean Co., South Korea’s biggest commodities shipping line, on June 7 filed for court receivership after a drop in rates left it unable to pay off its debt. KDB on Aug. 22 said it would provide the company 200 billion won ($179 million) for working capital.

Korea Development Bank was founded in 1954 to fund reconstruction and industrial development after the Korean War. The bank made a failed attempt to buy Lehman Brothers Holdings Inc. in 2008, before the Wall Street firm filed for bankruptcy.

Operations Split

In 2009, the lender’s operations were split and KDB Financial was created under the KDB Act to oversee them. Korea Finance was set up to do policy lending, leaving KDB with the roles of commercial lending, deposit taking and investment banking.

KDB Financial owns 43 percent of Daewoo Securities, South Korea’s second-biggest brokerage by market value, according to company data. A sale of the unit would follow the government’s attempt to sell larger rival Woori Investment & Securities Co.

The government began taking bids for Woori Investment earlier this month as part of a plan to divest its parent company, Woori Finance. Preliminary bidding for the brokerage, asset management and insurance units ends on Oct. 21. South Korea has failed to sell Woori Finance three times since 2010 due to lack of investor interest.