HSBC's KEB deal heralds further M&A for Korea banks

By Kim Yeon-hee and Rafael Nam

SEOUL (Reuters) - HSBC's agreement to buy a majority stake in Korea Exchange Bank (KEB) (004940.KS) is putting the South Korean banking sector under even more pressure to consolidate, amid growing prospects of privatization and sales.

HSBC Holdings Plc (HSBA.L) (0005.HK) said on Monday it agreed to buy 51 percent of the country's sixth-largest bank by assets from U.S. private equity firm Lone Star LS.UL for $6.3 billion.

The deal, if finalized, will bring another strong foreign player into South Korea's crowded banking industry, which has combined deposits of more than $750 billion. Citigroup (C.N) and Standard Chartered Plc (STAN.L) (2888.HK) became key players by buying local rivals in 2004 and 2005, respectively.

"Intensifying competition in the sector will drive many leftover banks to another round of integration," Merrill Lynch analyst Bryan Song said in a research note.

HSBC's acquisition, which is conditional on the resolution of several legal and regulatory hurdles, comes as South Korean banks are seeking to expand into lucrative non-banking financial services including wealth management, brokerage and insurance.

Asia's third-largest banking market has a booming $250 billion fund industry, Asia's third-biggest, that has already spurred a wave of acquisitions of asset managers as money flows into investment products from low-yielding bank deposits.

HSBC's stronger local presence and global expertise will likely be a threat to South Korea's top four banks -- Kookmin Bank 060000.KS, Shinhan Financial Group (055550.KS), Woori Financial Group (053000.KS) and Hana Financial Group (086790.KS), which account for about half of the country's banking assets.

Kookmin lost a bid last year to buy KEB from Lone Star for $7.3 billion after the private equity firm scrapped the deal, citing regulatory issues.

Analysts expect Kookmin shares to remain soft for the time being, whereas Goldman Sachs upgraded their rating on KEB to buy on Tuesday.

"HSBC will definitely tighten the competitive landscape. That won't be a good thing for banks' profitability," said Prudential Investment & Securities' analyst Sung Byung-soo.

"In particular, Kookmin and Hana, which wanted to buy KEB, can lose growth momentum from HSBC-KEB."

The race for a bigger share of the country's $380 billion market for high net worth individuals could also drive consolidation. Woori Financial Group said recently it was in talks with Merrill Lynch MER.N for a tie-up.

Woori, which runs the country's third-largest bank, is on the lookout for a private owner as the government is trying to reduce its 73 percent stake in the group.

The Industrial Bank of Korea (024110.KS), majority owned by the finance ministry, is also bracing for privatization in the medium term, while provincial players such as Jeonbuk Bank (006350.KS) and The Bank of Cheju (006220.KS) are expected to draw bidders who want a banking license.

South Korean banks went through a round of consolidation between 2000 and 2005 after the Asian financial crisis in the late 1990s sent some of them close to bankruptcy.