Foreign investors on Shinhan sell

Other Korean lenders watch out for spillover effects

By Kim Jae-won

The power struggle within the Shinhan Financial Group is raising concern in foreign investors and unless the situation stabilizes soon, they may have to keep selling shares of Korea’s most profitable big bank.

Korean lenders are also watching the situation closely, fearful that the protracted situation at Shinhan may invite a general inspection by financial regulators not just into Shinhan but also their banks.

For a week, Shinhan has been mired in a power struggle involving its three leading men after Shinhan Bank filed a criminal complaint against Shin Sang-hoon, president of its parent firm, Shinhan Financial, for a breach of trust in soured loan provision and the embezzlement of corporate funds.

“It is hard to comment on Shinhan because we are in the same industry,” a manager of Kookmin Bank said carefully. “I hope the situation can be normalized soon. Shinhan’s crisis affects our stock prices, too. Most of the industry see their share prices going up nowadays, but that of the financial services industry is plunging.”

However, the official admitted that the lender is seeing benefits from the crisis of its main rival.

“It is true that we are enjoying less attention from the media. We have been criticized for our leadership crisis so far, but now the focus has been turned to Shinhan.”

Hana Bank said Shinhan should have solved this dispute privately rather than bringing it out in the open.

“Its leaders have worked together for more than 30 years. It is uncomfortable to see their conflict on public display,” a Hana official said.

“I cannot understand the process of the loan provision. Nowadays, the Loan Examine Committee has full authority to approve loans. If a loan becomes problematic, then all the members of the committee take responsibility together.”

The Korea Exchange Bank (KEB) agreed that the amount of the loan in question was too big to be approved by a CEO himself.

“At least four to five executives should sign the document on a loan of such an amount,” a senior manager of KEB said.

“All of the members are supposed to be held responsible, if the loan becomes problematic. I don’t think all of the members just follow the CEO’s decision.”

Woori Bank, said it is a matter of trust, affecting the banking industry.

“I hope Shinhan will solve their problems, so we can regain the trust of consumers,” a senior manager of Woori said.

“My apprehension and that of the industry is that it will spill over to other banks and put them under scrutiny as well.”

Judging by the reaction of investors, their trust in Shinhan has already suffered.

Foreign investors said that they will continue selling the group’s stocks, and criticized its uncertain and unprofessional governance system.

“Many of our customers already have sold their stock in Shinhan. More and more customers want to sell the company’s shares,” a director from a foreign investment bank said on condition of anonymity.

“They are questioning whether Shinhan has a transparent leadership and process. They were also upset that the lender could not keep the issue under wraps.”

Shares of Shinhan Financial Group dropped 4,000 won, or 8.7 percent to 42,100 won on Wednesday afternoon since the group accused its president or wrongdoings a week ago.

Foreign investors led the selling trend, dumping shares valued at 177 billion won so far from Friday. Institution investors also sold shares totaling 51.5 billion won during the same period.

Analysts said it will be the worst scenario for Shinhan, if all three leaders step down in unison over this internal feuding.

“If all three leaders of Shinhan _ Chairman Ra Eung-chan, President Shin, and Shinhan Bank CEO Lee Baek-soon _ retire at the same time, it would create a leadership void,” an analyst from IBK Investment and Securities, said. “However, Shinhan has boasted of its good system. We will see how the group manages this crisis.”

Shinhan Bank alleged in its complaint that the group’s president and former CEO of the lender Shin had illegally approved a total of 95 billion won ($80.8 million) in loans to three companies connected to his relative.

Shin argued that the loans were approved through a legal process.

It is widely viewed as a power game in which Chairman Ra is trying to oust Shin. Shinhan Bank CEO Lee Baek-soon is trying to enlist the support of key stakeholders in Japan to hold a board of directors’ meeting with Shin’s dismissal on the agenda. However, it is unclear whether the meeting can be held and Shin dismissed, as some key shareholders resist the way Shin’s case is being handled.