S.Korea govt faces more pressure to push bank mergers

SEOUL Dec 2 (Reuters) - Deteriorating financial markets, looming corporate failures and a falling capital base could trigger the first major shake-up of South Korea's banking industry since the Asian financial crisis a decade ago.

The government is publicly baulking at using taxpayers' money to protect the industry from the global financial crisis and wants banks to work on ways to rescue themselves, saying it is ready to act as a catalyst for possible banking mergers in the world's 13th-largest economy.

But analysts say a deepening economic downturn may tempt the government, like those in the United States and Europe, to become more interventionist, buying new shares or equity-type bonds from banks and forcing some of South Korea's seven nationwide lenders to tie up with local rivals.

Governments the world over are grappling over how best to help their struggling banks cope with the crisis so they can continue lending and keep economies moving. Pressure to pump cash into banks in Asia or consolidate them has grown as companies and economies quickly succumb to the global slowdown, leading to more bad debts that could cripple weaker lenders.

"Within the next one to two years, mergers and acquisitions will pick up in the banking sector," said Lim Il-sung, an analyst at Meritz Securities.

"Given that excessive competition for size has been blamed as one of reasons for banks' current problems, we need a large-size M&A to put an end to that competition. Easing of bank ownership and financial holding company laws would provide a stimulus."

One industry source said Kookmin Bank, the biggest lender and a unit of KB Financial (105560.KS), and fourth-ranked Hana Financial Group (086790.KS) had discussed a possible merger before Kookmin launched a holding company in September.

Hana Financial is 18 percent owned by both Singapore wealth fund Temasek [TEM.UL] and Goldman Sachs (GS.N) in aggregate, while a number of foreign shareholders represent 56 percent of Kookmin.

Analysts expect Woori Finance Holdings (053000.KS) to take a central role to integrate with rivals in the form of equity swaps, but a stake sale plan for state-owned Korea Development Bank has been put on hold due to slumping financial markets.

The government, which owns 73 percent of Woori, has been seeking to reduce its stake to below 50 percent in the country's No. 2 financial holding group, which was hobbled by its exposure to risky U.S. subprime-mortgage related derivatives.

Any mergers of South Korean banks may conform to the government's hope of creating a bigger domestic bank, with new laws aimed at allowing non-banking companies to increase their shareholding in domestic banks pending at parliament.

RECAPITALISATION

South Korean banks plan to raise a combined 7 trillion won ($4.8 billion) within this year via the sale of subordinated bonds to lift capital ratios from a 7-½ year low, one regulatory official said.

The capital increase also comes as the government is calling for continued lending to smaller firms which the government sees as vital to prevent wider problems as economic growth falters.

Jun Kwang-woo, chairman of the regulatory Financial Services Commission, last week ruled out injecting public funds to bail out banks but said they could be exposed to market-driven mergers or acquisitions if they fail to recapitalise.

In the wake of the 1997-98 Asian financial crisis, South Korea's banking sector underwent a wave of consolidation after the government pumped about 100 trillion won of taxpayers' money into financial services firms and forced some to shut down.

As of end-2007, banking industry assets had more than doubled to 966 trillion won, of which top five lenders including Kookmin, Shinhan, Woori and Hana accounted for 80 percent.

But their aggressive asset growth until last year has crimped profit margins and would jack up bad loans in the economic downturn, although their bad loan ratio stayed at below 1 percent.

($1=1,468.0 Won)

(Editing by Jonathan Thatcher)