Standard Chartered Show Pitfalls of Banking in Korea

Hong Sung Sook, a 67-year-old Seoul housewife, says she’s getting ready to pull $100,000 of savings out of Standard Chartered Plc (STAN)’s South Korean unit and put it in a local bank. Paul Yoo, 60, the former country head of Lone Star Funds, is locked up in jail and refuses to talk to the press.

Their stories help explain why six years have passed since any overseas investor has taken over 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 Co. collapsed this month after the taxpayer-rescued firm failed to attract any bids from abroad.

Standard Chartered’s efforts to base pay on performance enmeshed it in the longest strike in Korea’s banking history, while Dallas-basedLone Star’s third attempt to exit a 2003 investment is entangled in court. Public mistrust of buyout firms, political opposition to government-backed reforms and abrupt regulatory changes may also deter fresh entrants.

“It’s clearly negative for foreign investors in any country to see a strike like this,” said James Rooney, chief executive officer of consulting firm Market Force Co. in Seoul. “Foreign investors can’t rely on South Korea’s government as rules are changed all the time.”

About 2,700 staff at Standard Chartered First Bank Korea Ltd. resumed duties yesterday for the first time in two months, while warning of further stoppages unless the company withdraws the new salary system. The union says performance-based pay would lead to job and wage cuts, while the company, known as SC First Bank, says it will improve competitiveness.

Last Straw

“The strike was the last straw,” said 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 dispute forced Standard Chartered to temporarily close 42 branches, a tenth of its network in a market that accounts for 11 percent of the London-based lender’s annual revenue.

It’s too early to determine the impact of the strike and branch closures on business, SC First Bank said in an e-mailed response to Bloomberg questions, declining to provide figures on deposits or loans. The bank said it would do its best to minimize inconvenience to customers, who are increasingly using automated teller machines and online services for banking.

SC First Bank’s market share fell to 6.6 percent of deposits at the country’s seven largest lenders in 2010, from 8.7 percent when Standard Chartered acquired the company for $3.3 billion five years earlier, according to regulatory filings.

Lose Customers

“It looks like it’ll be very tough for them to reach an agreement anytime soon,” Sohn Joon Beum, an analyst at LIG Investment & Securities Co. in Seoul, said of the labor conflict.

As cross-border financial-industry mergers falter in Korea, elsewhere in Asia they are picking up. Dai-Ichi Life Insurance Co. purchased Tower Australia Group Ltd. for A$1.2 billion ($1.3 billion) this year, and Malayan Banking Bhd bought Singapore brokerage Kim Eng Holdings Ltd. for S$1 billion ($830 million), Bloomberg data show.

Lingering public criticism and a legal dispute over Lone Star’s takeover of Korea Exchange Bank eight years ago is one reason why overseas investors shunned bidding for Woori Finance this month, according to Yun Chang Hyun, professor of business administration at University of Seoul.

Left Scar

“The scar Lone Star left here is too deep,” said Yun. “I don’t think any major foreign capital will try to penetrate the Korean banking industry for a while.”

The government received a solitary bid for Woori, from local private-equity fund MBK Partners Ltd., by its Aug. 17 deadline, forcing President Lee to abandon his second attempt to sell the nation’s biggest financial firm by assets. Woori was created in 2001 as a holding company for banks that taxpayers bailed out following the Asian financial crisis in 1997-1998.

Yoo has been back behind bars since July 21 on concern that he may flee while he, Lone Star and Korea Exchange Bank (004940) are retried on charges of stock-price manipulation. Yoo was jailed in February 2008, then acquitted and freed five months later.

Korea’s highest court in March ordered a retrial of the case, which charged him with spreading false rumors of a possible capital reduction at KEB’s card unit to drive down its stock price in 2003 and enable Lone Star to buy it cheaply.

Lone Star isn’t the only foreign financial firm being accused of wrongdoing in Asia’s fourth-largest economy. Four Deutsche Bank AG 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.

Delayed Sale

The case against Lone Star has delayed its planned 4.4 trillion won ($4.1 billion) sale of Korea Exchange Bank to Hana Financial Group Inc. (086790), the country’s fourth-largest financial company. The Financial Services Commission, a state regulator, said in May that it won’t decide whether to approve the takeover until the court makes its judgment.

Lone Star has had previous efforts to sell Korea Exchange Bank stymied by regulator inaction.HSBC Holdings Plc (HSBA) dropped a $6 billion bid for the lender in September 2008 after authorities left the plan in limbo for more than a year because of legal disputes involving the U.S. buyout fund. Criminal probes into Lone Star forced Seoul-based Kookmin Bank to cancel its plan to buy KEB in November 2006.

Failed efforts by officials to relax bidding rules helped to thwart the Woori sale, Yun said. In June, opposition party lawmakers rejected a plan by the Financial Services Commission that would have allowed rival Korean financial holding companies to take a smaller stake than the 95 percent required by law. President Lee abandoned a previous attempt to privatize the company in December because of a lack of bidders.

Clearer Plans

“The sales won’t succeed unless the government comes up with clearer and more detailed plans and gives proper rights and responsibilities to officials,” said Kim Sang Jo, a professor of international trade at Hansung University in Seoul who also leads shareholder activist group Solidarity for Economic Reform.

Korea’s financial watchdogs have been busy over the past year. The country began a three-month ban on stock short-sales on Aug. 10 after global market turmoil triggered a 15 percent drop in the benchmark Kospi stock index since the start of the month. Other directives have related to capital controls, taxation of bonds, mergers among savings banks, the role of domestic brokerages, companies buying foreign-currency bonds and bank holdings of currency derivatives.

“The Korean government has always been trying to improve transparency and efficiency of sound market function through our open market policy,” Ernst Lee, a spokesman for the Financial Services Commission, said in an e-mailed response to Bloomberg.

Lower Profit

Combined profit at 37 branches of foreign banks operating in Korea fell 43 percent to 538.5 billion won in the first half of 2011 as they booked derivatives losses and interest income dropped, according to the Financial Supervisory Service.

Regulators tried to resolve the strike at Standard Chartered. It has been more than a month since Financial Supervisory Service Governor Kwon Hyouk Se instructed his agency on July 18 to seek an early end to the dispute.

“Trade unions are a factor that foreign investors will consider when they’re deciding on entering Korea,” said Kenny Tang, Hong Kong-based general manager of AMTD Financial Planning Ltd. “Foreign investors will be worried.”

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