KDB confirms Lehman talks; Korea bank shares fall

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.

Online news service EDaily cited an unnamed financial industry source as saying the probability of KDB reaching a deal with Lehman stood at 30-40 percent due to pricing differences, adding the fate of any deal could be clear as early as next week.

"The size of a stake to be acquired would not be 25 percent, but rather be as much as would give KDB management rights," the source was quoted, referring to Britain's Sunday Telegraph report that KDB could buy up to 25 percent of Lehman.

TROUBLED WATERS

Analysts voiced concern about the risks to South Korean banks buying into the troubled U.S. investment bank.

"Nobody knows the depth of its (Lehman's) problems," a banking analyst at a domestic securities house said, asking not to be identified because of the sensitivity of the issue.

South Korea's government has long shown interest in one of its own banks becoming a global player to aid the shift to a more service-driven economy.

But the head of the country's financial regulator last week said that role should be taken by private banks with the state sector acting as no more than a catalyst.

Analysts have said the government is worried that it may end up having to use public money if things go wrong.

However, a senior Financial Services Commission official appeared to soften that stand when he told Reuters on Monday that the regulator would stay neutral over the KDB negotiations until it knows the terms.

He suggested the government might welcome a deal with Lehman if prices come down sharply but gave no indication of an acceptable level.

The fourth-largest U.S. investment bank is looking for buyers for some $40 billion of commercial mortgages and property on its balance sheet. It is also looking to ax some 1,200 jobs, or roughly 5 percent of the workforce, in its latest round of cost cutting, a person familiar with the matter said last month.

The Sunday Telegraph reported that Lehman had intensified talks with KDB to raise as much as $6 billion in a share sale that could be concluded this week, without specifying sources.

Lehman shares rose 46 cents to $16.55 in mid-morning NYSE trade.

(Additional reporting by Joe Giannone in New York; Editing by Jonathan Thatcher, Keiron Henderson, Louise Heavens, Dave Zimmerman)