HSBC to Negotiate Lower Price for Korea Exchange Bank

By Bomi Lim and Patricia Kuo

Aug. 4 (Bloomberg) -- HSBC Holdings Plc is in talks to cut the price for Korea Exchange Bank after Asian financial stocks tumbled 18 percent since the $6 billion purchase was announced in September, two people familiar with the matter said.

HSBC, Europe's largest bank, yesterday said it is still negotiating to buy Lone Star Funds' 51 percent stake in Korea Exchange Bank, after a second deadline for completing the deal expired July 31. The people, who declined to be identified because discussions are ongoing, didn't say by how much HSBC is seeking to reduce the price. Korea Exchange Bank fell the most in almost three weeks in Seoul trading.

The MSCI Asia Pacific Financials Index has slumped in the past year as the U.S. mortgage market collapse triggered a credit contraction and rising oil prices stoked concerns about a global economic slowdown. South Korean regulators have withheld approval for the deal until a legal dispute concerning Lone Star's 2003 purchase of Korea Exchange Bank is resolved.

``It would be natural for HSBC to try to renegotiate the price given the market conditions,'' said Shim Kyu Sun, an analyst at CJ Investment & Securities Co. who has a ``hold'' rating on Korea Exchange. ``As much as HSBC is determined to buy KEB, it's also true that the current price is too high.''

Korea Exchange Bank fell 3.1 percent to 12,650 won at 12:20 p.m. in Seoul, the most since July 16 and underperforming the 1.7 percent decline in an index tracking 54 financial stocks on the country's main bourse. The bank has a price-to-book ratio of 1.2, compared with 1.53 for HSBC.

`Being Patient'

The stock has fallen 13 percent since Sept. 3, 2007, when HSBC offered to buy Korea Exchange Bank for 18,045 won per share. HSBC later adjusted the price to 17,725 won a share to reflect the Korean bank's dividend payment earlier this year.

HSBC in April extended the first deadline by three months to buy control of Korea Exchange Bank, which would give it more than 7.7 million customers and 345 branches in Asia's fourth-largest economy.

HSBC hasn't terminated the agreement, the bank said yesterday in a statement to the Hong Kong Stock Exchange. ``We don't lose anything by being patient to get the deal done,'' HSBC's London-based spokesman Patrick McGuinness, said yesterday in a telephone interview.

``The stock price can go up and down, but the overall value of Korea Exchange Bank has increased over the years,'' Lee Sung Sik, a spokesman at the Seoul-based bank, said in an interview, declining to comment on negotiations between HSBC and Lone Star.

Falling Profits

Michael Breen, president of Insight Communications Consultants, which represents Lone Star in Seoul, said he had no immediate comment. Yoo Jae Hoon, a spokesman at the Financial Services Commission, wasn't immediately available.

HSBC may report its sharpest decline in profit since 2001 when it announces earnings today. First-half net income probably dropped 33 percent to $7.34 billion from a year earlier as costs for bad U.S. loans increased, according to analysts surveyed by Bloomberg. The company may say it added $9.7 billion to loan-loss reserves during the first six months of the year, after setting aside $27.8 billion over 2006 and 2007.

Korea Exchange Bank last week said second-quarter profit fell 11 percent from a year earlier as higher funding costs crimped margins from lending.

South Korea's Financial Services Commission said July 25 it will begin reviewing HSBC's application, which was first submitted in December, adding a final go-ahead would still depend on how the legal matters were resolved.

New Application

``The fact that HSBC has not exercised its right to terminate is a demonstration of HSBC's commitment to Korea and to our confidence in the Korean government,'' said Simon Cooper, chief executive officer of HSBC's South Korean unit, through a spokeswoman. The company will submit a revised application to regulators ``as soon as practicable,'' he said.

Lone Star and its South Korea country head Paul Yoo were cleared in June by the Seoul High Court of price manipulation charges, overturning a lower court ruling after Yoo spent more than four months in prison. Prosecutors have appealed to the Supreme Court. Calls to Lone Star were not answered.

In a related case, regulators also allege Lone Star's 2003 acquisition of the Seoul-based bank was engineered at an artificially low price through a political conspiracy.

Lone Star has already recouped about 75 percent of its $2 billion investment in Korea Exchange through stake sales and dividend payments.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net To contact the reporter for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net.