Industrial Bank of Korea (IBK) has launched roadshows for a 26.2 million global depository receipt (GDR) sale that could raise up to $318 million, based on Monday’s 12,800 won closing stock price.
Unlike previous IBK equity offerings, the deal is not a government divestment but an offloading of treasury shares and will price on April 15 under the lead of Citigroup, Goldman Sachs and UBS. According to a term sheet, the group will be offering up 4.76% of its share capital, with one GDR equal to one share.
The deal has been timed to take advantage of renewed foreign demand for South Korean equities, combined with IBK’s strong share price performance. The bank’s share price is 6% higher so far this year, although it has trended down since the end of March when it was up by as much as 14% for the year-to-date period.
Yesterday it closed down 3.03% after news of the new GDR offering broke.
Foreign investors have been net buyers of South Korean stocks over the past nine trading sessions, adding a further $150.93 million to their portfolios on Monday. This renewed enthusiasm has been attributed to a rotation back into select emerging markets.
This has been driven by receding fears of a Chinese meltdown and growing optimism about global economic growth prospects. As a result, South Korea's bellwether Kospi stock market index, which closely tracks global GDP sentiment, has turned higher and is now close to the psychologically important 2,000 mark again.
On Monday it closed 0.1% higher at 1,989.7.
IBK’s deal is likely to appeal strongly to momentum investors if the rally continues in the run up to next week's pricing. However, for long-only funds the key question is whether there remains much more upside and whether they need to be wary of a potential share overhang from a future government divestment.
Last November, the South Korean government sold a 4.2% stake in IBK, netting 264.94 billion won ($250 million) in proceeds after pricing at a 5% discount to the close.
However, the government had originally said it wanted to offload an 18.1% stake in 2013 and has stated its wish to reduce its ownership to 50% plus one share. The lock-up on its November divestment expired after three months.
The most recent deal represented 43 days trading volume, while the new deal will equate to roughly 22 days. The difference is largely because trading volumes in the stock have pretty much doubled since then and are currently averaging 1.23 million shares per day compared with 0.6 million five months ago, according to Bloomberg figures.
IBK’s share price has been rallying since the bank was re-designated as a public institution in January. Analysts believe stricter reporting requirements will push IBK to be more cost-conscious, which should improve its net margins and earnings.
Where are comparables trading?
At 12,800 won, IBK is currently trading at 0.54 times price to 2014 book -- a discount to its peers, which should also aid the syndicate’s selling efforts.
KB Financial Group, the holding company for Kookmin Bank and the largest bank in South Korea by asset value, currently has a book value of 0.79 times. Its shares are down 13% year-to-date.
Analysts say sentiment has been hit by a domestic data theft scandal, which prompted the regulator to impose a three-month ban in mid-February on some of the group’s credit card operations.
Hana Financial Group is also down 13% year-to-date and is currently trading at 0.78 times book, according to Bloomberg. Again, company-specific issues have hit the share price.
In this case they concern losses from a fraudulent loan scandal and prospective sanctions against Hana’s CEO for ignoring proper procedures when he was head of Hana Capital.
Neither issue helped Korea Exchange Bank’s efforts to sell 4.35 million shares in Hana early last month. A first $168 million deal fell through on March 5 but eventually succeeded two days later after a number of global funds agreed to participate.
They are not likely to have been very happy with the bank’s share price performance since then. KEB’s the 4.35 million share deal was priced at an exceptionally slim 1% discount to close at 40,800 won. The stock has since traded down 6%.
One brighter spot in the Korean banking sector is Shinhan Financial Group. The bank is currently trading on a book value of 1.10 times, with shares down 1.82% so far this year.
Selling points, risks
In its prospectus IBK highlights government support as a competitive strength, while its focus on small- to medium-enterprises also separates it from the competition.
The bank is also in expansion mode – recently opening branches in Hanoi and Wuhan, along with a representative office in New Delhi. In addition, IBK has signed memorandums of understanding with JP Morgan, Unicredit and State Bank of India to allow South Korean small- and medium-sized enterprises to obtain credit directly from the respective local institutions, backed by an IBK payment guarantee.
Yet some may be wary of the risks associated with investing in a bank focused on SMEs as they are particularly sensitive to fluctuations in the South Korean economy. In addition, SMEs tend to be less reliable reporting financial information than larger corporations, which makes it difficult for banks such as IBK to judge the risk in lending accurately.
The bank’s loans to SMEs increased to 108.8 billion won in 2013 from 103.9 billion won in 2012 and 98.7 billion won in 2011. At the same time, non-performing loans increased 6% year-on-year between 2012 and 2013, although the bank’s write-offs fell 18% during the same period.
IBK also has significant exposure to a number of industries that have been under pressure since 2008, namely construction and real estate. The domestic construction industry has experienced a downturn in the past few years, largely due to excessive investment in residential property development projects, stagnating prices and reduced demand for real estate, particularly in areas outside Seoul.
IBK says it will use proceeds from its deal to improve its capital adequacy ratios and extend development finance and other related-banking services to the SME sector.
