South Korean Stocks Fall to Three-Year Low on Funding Concern

By Saeromi Shin and Bomi Lim

Oct. 17 (Bloomberg) -- South Korean stocks fell, dragging the Kospi Index to a three-year low, on heightened concern the country's banks will struggle to refinance their debt.

KB Financial Group Inc., the holding company of Kookmin Bank, slumped 7 percent, as Standard & Poor's said South Korea should consider guaranteeing banks' debt. The agency said on Oct. 15 it may cut the credit ratings on Kookmin and six other financial companies. Woori Finance Holdings Co., which controls South Korea's second-biggest bank, retreated 7.7 percent.

The Kospi dropped 12.11, or 1 percent, to 1,201.67 as of 1:5 p.m. in Seoul, with financial stocks accounting for 60 percent of the decline. The index was set to close at its lowest since Nov. 1, 2005.

``It's true that domestic banks find it more difficult than before to raise funds in both dollars and won, and people therefore feel that money circulation is a bit clogged,'' said Im Jeong Jae, a fund manager at Shinhan BNP Paribas Investment Trust Management Co. in Seoul, which manages the equivalent of $747 million in local equities.

Concern about the banking sector, initially triggered by the global credit squeeze, deepened after a slump in the domestic property market raised fears that debts made to builders could turn bad. Korean banks are feared to lose billion of dollars as more than 500 Korean companies are struggling to repay currency derivatives the banks sold.

A measure of financial shares on the Kospi slumped 4.2 percent. The gauge tumbled 12 percent yesterday as S&P said Korean banks face a more than 50 percent chance that the global credit crunch could threaten their foreign-currency funding. South Korea's lenders have $235.3 billion of foreign-currency liabilities, according to the Financial Supervisory Service.

Emergency Meeting

South Korea should consider guaranteeing banks' debt to help them overcome difficulties obtaining overseas funding and bolster confidence in the financial system, Kwon Jae Min, a credit analyst at S&P in Hong Kong, said today in an interview.

KB Financial tumbled 8.6 percent to 39,650 won. Woori Finance retreated 5.9 percent to 10,400 won. Shinhan Financial Group Ltd., which runs the third-largest bank, declined 8.3 percent to 33,900 won.

South Korean policy makers held an emergency summit today, seeking steps to restore confidence in the economy after the funding concern caused the won to slump by the most since the 1997 financial crisis yesterday, and the Kospi to fall by the most since Sept. 12, 2001.

Finance Minister Kang Man Soo, central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the nation's financial regulator, led the meeting at the presidential office in Seoul.

To contact the reporter on this story: Saeromi Shin in Seoul at sshin15@bloomberg.net. Bomi Lim in Seoul at blim30@bloomberg.net