The country's commercial banks are considering mergers and acquisitions with each other to cope with the world's largest lender, which is ready to make inroads into the South Korean market.
Industry analysts say Citigroup is expected to launch aggressive marketing for a greater share in South Korea, which could threaten the fate of local banks whose profits are already plunging due to soaring insolvency of consumer loans and credit card bills.
Citigroup is in the final stages of talks to buy a controlling stake in KorAm Bank from a U.S. consortium led by Carlyle Group and J.P. Morgan, a senior financial regulator said. The sale is likely to be concluded as early as this week, or by the end of this month at the latest, he said.
KorAm Bank officials denied a final contract with Citigroup, but the U.S. giant is widely expected to win the bid for the South Korean bank, with asset of 49 trillion won ($42 billion).
Citigroup is close to buy all of Carlyle Group's 36.6 percent stake in KorAm. Carlyle, a U.S. investment fund, is the largest shareholder in the South Korean bank. "Carlyle is now weighing bidding prices and other detailed terms proposed by Citigroup," sad the financial regulator, speaking on condition of anonymity.
At Thursday's share price, a 36.6 percent stake in KorAm was valued at nearly $1 billion, making the deal potentially the largest foreign investments in South Korea's financial sector. Carlyle bought its stake in KorAm together with the private equity arm of JP Morgan for $392 million in November 2000, and invited bids for the stake late last year.
KorAm shares have jumped 47 percent over the past six months. Its shares rose 7.84 percent to 15,800 won on Thursday, despite that it said its net profit plunged 82.3 percent year-on-year to 46.2 billion won ($39.7 million) in 2003.
Citigroup is also pursuing a 9.76-percent stake from U.K.-based Standard Chartered, KorAm's second-largest shareholder. The U.S. banking giant is seeking to buy more than 46 percent stake, spending some 3 trillion won ($2.6 billion), to gain full control of KorAm.
If finalized, the sale would mark the first takeover of a South Korean bank by a foreign bank. Lone Star Funds and Newbridge Capital, which control Korea Exchange Bank and Korea First Bank, respectively, are private equity funds.
Citigroup, which entered South Korea in 1967, has been eager to expand its retail business by taking over a South Korean retail bank. Citigroup, HSBC Holdings Plc. and Standard Chartered are the only foreign banks operating in South Korea's consumer loans market,
A takeover of KorAm would give Citibank 225 branches in one swoop, making it a major player in the local retail banking sector and posing an instant threat to South Korean financial institutions. KorAm's nationwide branch network will help Citibank penetrate South Korea's retail banking market.
Citibank has now only 12 branches in South Korea with total asset of 1.34 trillion won ($1.15 billion) and 1,059 employees. Industry watchers say Citibank will eventually merge with KorAm.
The news of Citigroup's impending acquisition of KorAm has immediately put South Korea's commercial banks on alert, sparking concerns about growing foreign influence over the country's financial sector.
Analysts predict local banks would seek mergers and acquisitions to make them bigger to cope with the U.S. financial services giant. "Citibank armed with an enormous know-how in risk management and product development could threaten the profits of local banks," said Jason Yu, an analyst at Samsung Securities. "The deal will trigger a big change in local banks," he said.
Kookmin Bank, the country's top lender with asset of 220 trillion won ($189 billion), said it was considering M&As with local banks to make it bigger. "If Citibank takes over KorAm Bank, it pose a serious threat to local banks," said Kim Jung-tae, the chief executive of Kookmin, vowing to seek merges with smaller rivals.
Kookmin, which controls 40 percent of the country's household loan market, recently posted a net loss of 230 billion won ($198 million) in the fourth quarter, mainly due to losses stemming from its credit card operations and its debt exposure to ailing LG Card Co.
Kookmin, which merged with its credit card unit Kookmin Credit Card Co. last year, has been hit hard by the country's consumer debt crisis. It has recently decided to take over Hanil Life Insurance Co., a state-owned insurer, in an effort to bolster its insurance business. In 2001, it merged with the now-defunct Housing & Commercial Bank.
Lee Duck-hoon, president of Woori Bank, the country's third-largest lender, made clear that his bank would seek partners for a merger to cope with Citibank. "The asset of Woori Bank totaled 119 trillion won ($102 billion). It cannot compete with Citigroup whose asset reaches $1.97 trillion," he said. "Our asset should increase to more than 300 trillion won ($258 billion) for survival," Lee said.
Woori Bank, is the flagship unit for Woori Finance Holdings Co. The government controls an 86.8 percent stake in Woori Financial Group, whose 2003 net profit plunged 90.4 percent from a year ago due to a huge loss at its credit card unit.
Shinhan Financial Group is also seeking merging partners. Shinhan Financial Group, whose flagship is Shinhan Bank, bought Chohung Bank last September to become South Korea's second-largest lender.
London-based international lender Standard Chartered is expected to buy a stake in Hana Bank, the country's No. 3 lender, following its failed bid to take over KorAm Bank. The government, which holds a 21.6 percent stake in Hana, is seeking to sell a 12.3 percent stake by the end of June, expecting the bank to buy back the remaining 9.3 percent by the year-end.
Government officials welcome the international standards of management and risk control that Citigroup would bring to the South Korean financial sector. "Citibank will help local banks increase competitiveness and play a role in upgrading South Korea's financial services," a senior finance ministry official said.