KDB confirms Lehman talks; Korea bank shares fall

By Kim Yeon-hee

SEOUL (Reuters) - State-owned Korea Development Bank (KDB) confirmed on Tuesday it was in talks with Lehman Brothers LEH.N over a possible joint investment in the U.S. bank with other Korean banks, sending Lehman shares higher but depressing local bank shares.

Lehman, which has racked up crippling losses and still bears more than $60 billion of mortgage and commercial real estate exposure, is under pressure to raise capital ahead of its earnings announcement this month. The No. 4 U.S. investment bank has explored shedding assets, spinning off its money management arm and selling a significant stake to outside investors.

"Our CEO said talks are ongoing and cannot disclose the content of them," KDB spokesman Sung Joo-young said, referring to Chief Executive Min Euoo-sung. Min ran Lehman's Korea operations until June.

Shares of Lehman rose more than 3 percent in morning trade on the New York Stock Exchange. The firm's stock has soared 27 percent since Aug 19 amid speculation Lehman would strike a deal that would raise needed funds.

On August 22, Reuters reported that KDB was considering investing in Lehman, the first in a series of reports that indicated Lehman's rescue may come from Seoul.

Lehman's shares slumped more than 70 percent this year and trade at about half their book value, yet another casualty of the ongoing credit crunch. Lehman, which currently has a market value of about $11 billion, declined to comment.

Buying a top bank could catapult South Korea's financial services firms into the top ranks of global investment houses, which have been battered by heavy mortgage write-downs, and which have seen their share prices tumble.

JITTERY

But investors are jittery about a potential Lehman tie-up, which may involve top South Korean banks such as Shinhan Financial Group (055550.KS), Woori Finance Holdings (053000.KS) and Hana Financial Group (086790.KS), on concerns about the extent of problems at the U.S. bank.

Shares at Woori, the country's No. 3 financial services firm, tumbled 6.3 percent to their lowest in almost three years. Second-ranked Shinhan trimmed falls to close down 1 percent and No. 4 Hana shares shed 2.6 percent, underperforming a 0.5 percent fall on the wider market .

Min also said his bank was in discussions to form a consortium with private banks to jointly buy Lehman, but pricing remained an issue, according to his spokesman.

A senior executive of another top South Korean bank told Reuters that KDB had a strong interest in Lehman, but that detailed terms of a possible agreement had yet to be determined.

The banker, who asked not to be named, said his bank would wait and see if KDB was successful in its talks with Lehman before deciding whether to join any consortium.

"It would be in the form of buying new shares or existing shares. But this kind of deal still has a high possibility of falling through, because Lehman could be in talks with other banks in other parts of the world," he said.

A spokesman for Woori Bank, part of Woori Finance, said the state-controlled bank would also wait before making a decision to team up with KDB in any deal. Hana Financial Group denied any interest in joining a consortium bidding for Lehman shares.