By Kim Tong-hyung
As unfashionable as it is to feel sorry for bankers, it’s hard to suppress a pang of sympathy for Larry Klane, the frequently-bashed CEO of Korea Exchange Bank (KEB) and repeated victim of Korean bureaucratic inertia.
Klane was thrown into a new round of public relations (PR) battles last week after his bosses at Texas-based Lone Star Funds, the U.S. private equity fund that controls KEB, decided to take 496.8 billion won (about $467 million) in interim dividends from the bank.
The record payment assured observers that Lone Star was recouping more than its investment in KEB, which it acquired in 2003, and predictably reignited public criticism about ``meoktwi’’ (eating and fleeing) foreign capital reaping huge profits from once-distressed Korean assets.
Financial Supervisory Service (FSS) officials, perhaps in eagerness to massage the ego of the masses, had called in Klane to request that the bank refrain from paying out high dividends, hours before the board meeting.
Lone Star, however, was determined to get paid and displeased financial authorities are now seen feeding media theories about how the lavish payout hurts KEB’s value and long-term growth potential.
But what else could have been expected? It was obvious that the profit-thirsty buyout firm will continue to soak its throats with dividends as long as regulators prevent it from selling the bank and leaving, as they have done again and again and again.
The FSS has indefinitely delayed their approval for Lone Star’s $4 billion-plus deal to sell KEB to Hana Financial Group.
It prefers to wait until the results of the Seoul High Court’s retrial of Lone Star’s former Korean head Paul Yoo on stock price manipulation charges, after the Supreme Court overturned a 2008 not-guilty verdict in March.
FSS officials claim they need the court’s verdict to decide on Lone Star’s eligibility to be KEB’s top shareholder, which prevents them from making a quicker review of the Lone Star-Hana deal for the sale of KEB.
Should they continue to use the legal issues as excuses for indecisiveness and unaccountability, than they have no right to keep ranting about Lone Star taking out dividends; the approval of the Lone Star-Hana deal depends on an assessment of Hana’s financial credibility as buyer, not the make-up and character of the company it’s buying from.
The latest dividend plan has enabled Lone Star to recoup more than its 2.15 trillion won investment in 2003 when it took over the country’s sixth-largest lender, with its combined earnings in dividends and income from its block sale of a 13.6 percent stake in KEB in 2007 reaching 2.9 trillion won.
And perhaps, all the alarmist talk about how Lone Star’s ``greed’’ is irrevocably damaging KEB’s corporate value is a convenient way for financial authorities to conceal their ineptitude.
The concerns, however, aren’t backed by the numbers, which show no evidence that KEB has regressed under Lone Star’s stewardship.
During the past five years, KEB used 45 percent of its profit for dividend payments, significantly more than bigger rivals like KB, Woori, Shinhan and Hana, which spent between 11 to 23 percent, but less than SC First Bank, which spent 60 percent.
The assets held by KEB last year barely accounted for one-third of those held by KB and Woori, which compete closely for the title of the country’s largest banking group. However, KEB’s annual profit of 1.02 trillion won was more than 90-times larger than what the inefficient KB managed and nearly matched Woori’s 1.1 trillion won.
KEB also led commercial banks in net interest margin, a measurement of bank profitability, and had the lowest proportion of bad assets, while its supremacy in foreign exchange dealings continues to be undisputed, evidenced by its near-48 percent market share as of June.
The hefty dividends payment isn’t expected to be as much of financial strain on KEB as critics make it out to be. The bank is forecasting a record quarterly profit for the April-June period, when its BIS ratio, a key measure of a bank’s solvency, is expected to stay at around 14 percent.
The FSS could do everyone a favor by putting an end to the uncertainty by making a fast decision on whether Hana is the right buyer or not; regardless of the outcome in court, it’s obvious that Lone Star is keeping the money it made from KEB so far and likely to leave with significantly more.
But how much can be expected from financial authorities, who have shown in past months that their need to feel safe supersedes all their other desires?
Even an untutored observer can predict the ending to this saga, which is now in its eighth year. The FSS will wait for the court ruling, which is expected to vindicate the prosecution, to declare Lone Star as ineligible as KEB’s top shareholder and walk away from the mess with its face intact.
And this will somehow end up as a win for Lone Star too. The buyout fund will be deprived of its management rights of the company, but still retain the ownership of its shares, of which it will be required to sell all but 9 percent within six months.
That would be Lone Star’s back-handed ticket out of Korea, although it might not mind the FSS dragging its feet just enough for a couple more dividend payments.