Banks under fire for overseas losses

By Kang Seung-woo

Major financial groups and banks have been under fire for soaring losses from investment abroad, raising questions over whether the poor outcome of their global expansion was due to just bad timing or wrong strategy?

Local banks have claimed that they were the right investment at the wrong time but market experts point out that they should take more cautious and strategic approach when going global.

The issue re-emerged after lawmakers recently criticized local financial firms for overseas losses at the parliamentary inspection.

Rep. Bae Young-shik of the governing Grand National Party (GNP) said that Woori Financial Group’s acquisition of Hanmi Financial Corporation (HAFC) has incurred huge losses due to wrong valuation of the company.

Woori, the nation’s second-largest financial group has recently been authorized to acquire stocks of HAFC by the California Department of Financial Institutions (DFI). HAFC is the holding firm for Hanmi Bank, the largest Korean-American bank headquarters in Los Angeles.

According to Bae, Woori became the largest holder of HAFC after entering into a securities purchase agreement with the corporation in May. Under the agreement, Woori purchased a total of $240 million of new stocks issued by HAFC at a price of $1.2 per share, enabling the Korean firm to own a more than 51 percent stake in Hanmi.

HAFC, founded in 1982, is a financial holding firm with non-banking subsidiaries. The firm, listed on Nasdaq in 2001, owns $3.18 billion in total assets and runs 27 branches with 476 employees as of the end of March.

The 61-year-old raised question about the takeover share price. The stock price of HAFC was at $2.3 when Woori signed the agreement, but it has fallen to $1.25 as of Tuesday.

He also pointed out that the Federal Reserve Board (FRB) rejected HAFC’s request for public funds, believing that HAFC was not able to normalize its operation. He added that since its net loss over the past four years is estimated to reach up to $400 million, the $240 million capital increase will not help put the firm back on track.

Woori countered, saying that per share takeover price was set at $1.2, reflecting the HAFC’s first-half accumulated deficit of $365 million. It was 45 percent off the book value. It also said that HAFC’s annual profit stood at around $60 million before the global financial crisis and its shortfall has decreased steadily.

As for HAFC’s recent sliding share price, Woori said that it was just stock dilution caused by the issue of additional common shares by a company in July.

Ahead of the securities purchase agreement, Woori Bank, the holding firm’s flagship unit, lost $1.25 billion after investing $1.07 billion and $480 million in collateralized debt obligation (CDO) and credit default swaps (CDS) on subprime mortgage, respectively, between 2005 and 2007 and officials involved in the business were brought to the prosecution.

Kookmin Bank also suffered a large amount of losses from its expansion to Kazakhstan.

In 2008, the country’s No. 1 lender purchased a 41.9 percent stake in Bank CreditCenter (BCC) for 939 billion won, but the value of the stake nearly halved.

Despite finding that BCC had a lot of external debt, former CEO Kang Chung-won failed to report it to the bank’s board of directors. As a result, Kang was handed down a penalty, which will bar him from working in the financial industry for three years.

As for Shinhan Bank, its U.S. subsidiary, Shinhan Bank America, was hit hard by the financial difficulties in 2008, so it increased the capital of approximate $30 million and dispatched seven officials to fortify risk management last year.

Lack of experience

Economists say that the global crisis was the key culprit behind the players’ poor performances but there were also problems with their approaches and strategies.

“They had bad timing in their forays into overseas markets due to the global financial crisis,” a Seoul-based analyst, who declined to be identified, told The Korea Times.

“When local financial institutions were starting looking abroad, the subprime mortgage meltdown took place in the United States and Kazakhstan was affected by falling oil price.”

Another economist said that local players were late in the process of globalization.

“Unlike Korean financial institutions, Chinese counterparts go hand in hand with major banks in Europe and the United States. As a result, Koreans turn their sights to developing countries, but it is also not a done deal because they are already acquired by others. In this regard, Koreans are a little bit behind,” he told The Korea Times on condition of anonymity.

A lack of experience in overseas market also crippled their expansion.

“The BCC case was the single largest investment in the nation’s financial industry,” he said.

“In addition, the BCC deal was signed before the crisis, so it was more difficult for the bank with little experience to predict.”

Despite the deficit, the market thinks that local financial players should continue going abroad.

“Korea’s industrial sector, including the information technology (IT) and vehicle areas, is way ahead of financial one. That is why the financial industry has to be globalized. They need to go overseas and set up a local subsidiary, take over a company there or whatever they need in order to do business there. Of course, there can be trials and errors because they are at an early stage,” the analyst said.

The other says that we had better be patient on their results.

“As globalization requires enough time to come to fruition, it is a little bit premature to criticize them for poor performances.”