UPDATE 3-KB Financial eyes share issue; Korean bank shares slide

* KB Fin says considering new share sale to raise capital

* Speculation that funds raised may be used for buying KEB

* Shares in Woori, Hana down over 5 pct, KB trims losses (Adds fund manager comment, KEB share price, bank CDS moves)

By Kim Yeon-hee

SEOUL, June 3 (Reuters) - KB Financial Group (105560.KS), parent of top South Korean bank Kookmin, said on Wednesday it might sell new shares to raise capital and local media reported others could follow suit, pushing down shares in the sector.

KB's (KB.N) announcement heightened speculation that it is raising the funds to bid for smaller rival Korea Exchange Bank (KEB) (004940.KS) in a move to expand its corporate banking presence.

Recent gains in their battered stock prices are emboldening some South Korean banks to consider raising fresh capital for business growth, although most may still use any funds garnered to cushion their balance sheets that have been stung by the global economic slowdown and a surge in bad loans.

The nation's banks have already raised a combined 28 trillion won via issues of new shares and equity-type securities from the last quarter of 2008 through end of May, government figures show.

If a bid materialises, it will be the second time KB tries to consummate a relationship with KEB, in which U.S. private equity firm Lone Star [LS.UL] owns 51 percent, valued at 3.2 trillion won ($2.6 billion) at current market prices. An initial deal in 2006 to buy KEB from Lone Star stumbled over a legal dispute.

Shares in KB pared early losses by the close, as investors took a more positive view of a possible renewed bid for the country's No. 6 bank, which would be the first major consolidation in the local banking sector since Standard Chartered's (STAN.L) 2005 purchase of Korea First Bank.

"If the funding is intended to finance M&A, it would not be bad news," said Jon Jong-woo, a fund manager at Samsung Investment Trust Management.

KB did not say why it wanted to raise capital.

"We are looking into several options to boost capital, including the issuance of new shares, selling existing shares in ourself or issuing hybrid securities," KB spokesman Choi In-seok said by telephone. "But nothing has been decided in detail."

Shares of third-ranked Woori Finance (053000.KS) and No. 4 Hana Financial (086790.KS), slid more than 5 percent, despite their denials of media reports that said they planned new share issues. New issues normally don't go down well with shareholders as more investors will lay claim to the issuer's earnings.

In sharp contrast, KEB shares hit a more than 7-month high.

Shares of major South Korean banks had risen more than 30 percent from the lows of March through the end of last week on prospects of a rebound in banks' earnings, with lending margins and loan delinquency ratios showing signs of improving, and on expectations of a possible new wave of consolidation.

TIGHTENED CDS

The Maeil Business Newspaper, in a report on Wednesday, quoted an unnamed senior Woori official as saying that recent stock market gains would be conducive to selling new shares.

The daily also cited unidentified industry sources as saying that Woori, 73 percent owned by the government, was closely looking at raising more than 1 trillion won in a new share sale.

Woori spokesman Lee Won-chuel said the group had not considered a new share issuance "officially."

Globally, banks have raised nearly $400 billion over the past two-and-a-half years through issues of equity and preferred shares as they fought the worst financial crisis since the Great Depression, according to Thomson Reuters data.

And Bank of America (BAC.N), JPMorgan Chase (JPM.N) and other banks said this week they have raised more than $19 billion, as they attempt to repay funds borrowed from the U.S. government.

KB Financial's capital adequacy ratio under the Bank for International Settlements stood at a provisional 13.16 percent at the end of March, well above the government's new guideline of 10 percent. Woori Finance's was 11.40 percent.

Woori shares ended down 5.7 percent at 10,750 won, trimming initial losses but remaining the second biggest percentage loser on the main board during the day. KB shares declined 1.5 percent to close at 41,350 won, underperforming the steady wider market . Hana shed 5.9 percent to 28,150 won.

Credit default swap spreads of the Korean banks have narrowed sharply since March, indicating that investors are much more confident about them meeting their bond obligations.

According to CDS data provider Markit, CDS spreads of Woori, Korea Development Bank, Industrial Bank of Korea and Korea EXIM bank were among the five that showed the most improvement in all of Asia on June 2. ($1=1239.3 Won) (Editing by Jonathan Thatcher and Muralikumar Anantharaman)