Easier Rule on Ownership of Banks — Boon or Bane?
By Park Hyong-ki
Staff Reporter
Analysts say bank shares will gain on improved sentiment, benefiting from deregulation in ownership and management of lenders promised by President-elect Lee Myung-bak. But they say its effect will be limited.
Although he did not specify as to how much such rules will be relaxed, Lee pledged to do so to prevent lenders such as Woori to fall into foreign investors and eliminate discrimination against domestic enterprises. Foreign investors have acquired most of the controlling stakes in Korean banks such as Kookmin and Hana.
Under the current financial industry restructuring law, non-financial companies are in principle banned from owning more than 4 percent of a bank. Given the huge costs for the purchase of a major stake in a bank, the laws are meant to keep top chaebol or conglomerates from controlling banks.
Park So-yeon, an analyst of Korea Investment & Securities, said deregulation will certainly boost mergers and acquisitions, and fire up valuation of bank stocks going forward. It will also propel the government to swiftly privatize state-run banks, and help finance small- and medium-sized enterprises.
However, she remains skeptical that the new government will ease rules significantly. Citing top 100 global banks as an example, there are only nine banks whose majority shareholders come from industrial capital. Of 292 corporations owning shares of top 100 banks, about 94 percent hold less than 10 percent.
She said the European Union is the only economy that does not regulate corporations in becoming major shareholders of banks, but their shareholdings are small.
Given that Korea always aims to adopt ``international-standard'' policies, it is unlikely the country will dramatically relax banking rules and allow conglomerates to hold controlling stakes in banks.
``Considering anti-chaebol sentiment, which has grown since Samsung's alleged slush fund, it is doubtful that the new government will make extreme deregulation moves,'' said Park.
Rough Sailing Ahead
She said it might move toward easing rules allowing funds such as the National Pension Fund to invest in banks as strategic investors, and expand their voting rights a little.
Daewoo Securities analyst Ku Yong-uk agrees that such an attempt is reasonable. Woori Financial Group recently expressed its hopes that the pension fund would purchase up to 15 percent of the nationalized lender.
He said easing of rules will help create new demand for bank stocks, but he sees no merit by allowing conglomerates to buy controlling stakes, as more complications will rise.
He noted that should deregulation take place, chaebol along with financial firms are bound to be placed under regulators' strict radar, checking for transparency on whether they are using banks as private coffers. ``I doubt any chaebol would like that as deregulation points toward more regulation on them.''
Reflecting on banks' performances nowadays, Ku mentioned that deregulation will not warrant their rally on the stock market in the near future, but ``sound fundamentals will.''
Banks are having trouble in raising funds amid the U.S. subprime lending turmoil, and the analyst expects lenders to go through difficulties until the end of the first half of 2008.
To make up for fund shortages and falling margins, banks have opted to issue certificates of deposit and bank bonds with high interest rates. The rise in benchmark CD rates point to interest rate hikes on floating-rate mortgages, further burdening home borrowers.
``It's a hard time for banks, and while they try to readjust their operations, consumers will be the most burdened by it,'' said Ku.
Koo Kyung-hwe, an analyst of Hyundai Securities, said although the deregulation move is positive to some extent, uncertainty remains as lawmakers are split over the issue.
``In order for deregulation to happen, the Grand National Party needs to become the majority party through the general election in April next year,'' said Koo.