ING Group last night sold its 5% stake in Korea’s KB Financial Group through a block trade, raising W727.11 billion ($671 million). KB Financial is the holding company for Kookmin Bank, the largest bank in Korea by asset value.
The sale was expected, particularly since the Dutch bank and insurance company has announced that it intends to divest its 49% stake in KB Life Insurance, which is a joint venture with KB Financial. It was also in discussions last year to sell its own life insurance business in Korea to KB Financial for $2.1 billion, although that deal fell through in December.
ING is also in the process of divesting non-core businesses globally as part of the conditions attached to a €10 billion ($13.5 billion) rescue loan that it obtained from the Dutch government in October 2008.
Indeed, in a statement posted on its website after the sale last night, ING said the transaction is in line with its strategic objectives to sharpen its focus and further strengthen its capital position.
There was also quite a lot of talk about a potential transaction when KB Financial’s share price reached W40,000 in late January.
But the timing was a bit surprising as many investors and bankers in Asia are still on holiday after the start of the Lunar New Year earlier this week. Singapore and Malaysia were closed for trading on Monday and Tuesday, Hong Kong observed a three-day holiday and didn’t reopen until yesterday, and Taiwan and China are shut all week. However, in South Korea and Japan, stock markets have been open since Tuesday.
The immediate expectation when the block launched at 4pm Hong Kong time yesterday was therefore that ING would have to rely on demand from domestic Korean funds to cover a large portion of the deal. And the fact that the shares were offered at a tight discount reinforced that belief.
However, a source said the demand was actually skewed towards international accounts, particularly US and global value investors who have a positive view on the company and saw an opportunity to buy a stock that has been lagging its Korean peers. Hedge funds were not that keen, however.
This was a clean-up trade for ING, which always helps attract more demand as investors don’t have to worry about a continuing overhang on the share price. But it was also the last among the blocks of shares in KB Financial that have been viewed to be for sale. And that may have increased the confidence among investors to buy now.
In July 2011, Kookmin Bank sold the rest of its KB Financial treasury shares through a $1.7 billion block trade and in April last year steel manufacturer Posco sold all of its shares in the company that aren’t tied up by an outstanding exchangeable bond.
The ING transaction comprised 19.4 million shares, or about 16 days of trading. They were offered at a price between W37,480 and W37,750 each, which translated into a discount of 0.7% to 1.4% versus yesterday’s close of W38,000.
As noted, the discount was viewed to be tight and it was no surprise that the price was fixed at the bottom of the range for the maximum discount of 1.4%.
There was no information about the number of investors who participated in the deal, but the source said it was comfortably covered when the order books closed at 9pm and all the shares were placed out.
ING has owned these shares since 1999 when it invested in H&CB, a Korean bank that was later merged with other entities to form KB Financial. In a statement posted on its website, ING said the sale will result in a net profit of approximately €100 million ($135 million), which it will book in the first quarter this year. It will also have a positive impact of about eight basis points on its core tier-1 ratio, which stood at 11.9% at the end of 2012.
ING further said that the sale of the stake in KB Financial will not affect its own commercial banking activities in Korea, and added that the process to sell ING Life Korea and its stake in KB Life Insurance is continuing.
The divestment came after ING announced a 32.5% drop in net profit in 2012 to €3.9 billion and a 5.2% decline in underlying net profit to €2.6 billion. In his comments on the earnings, CEO Jan Hommen noted that the group reached an agreement with the European Commission last year that gives it more time and greater flexibility for the continuing restructuring, but the sale of its KB Financial shares shows that it is keen to get on with the rest of its planned divestments.
The fact that it failed to sell its insurance operations in Korea last year may also have increased the urgency to raise capital by other means.
KB Financial’s share price has fallen from a 2013 high of W40,750 in late January and is up just 0.3% so far this year. By comparison, sector peers like Shinhan Financial Group and Woori Finance Holdings are up 3.5% and 6.8% respectively and Hana Bank has rallied 15.9%. However, the benchmark Kospi index is down 0.9%.
Partly as a result of this underperformance, KB Financial is one of the cheapest names in the sector and analysts are mostly positive on the stock. According to Bloomberg data, 34 analysts have a “buy” recommendation on it, while nine recommend investors to hold. None of the analysts following the stock rates it a “sell”. The average 12-month target price of about W46,400 implies 18% upside from the current levels.
In a research note issued last week, analysts at J.P. Morgan said it remains positive on Korean banks and expects a further share price rally in the next couple of months at least, even though the fourth-quarter results were disappointing.
“We recommend that investors re-enter into these names on any post-results share price weakness,” the analysts wrote, adding that positive share price drivers may include further rate cuts by Bank of Korea, new government measures to boost domestic consumption, and industry-wide restructuring efforts, including the privatisation of government-owned banks.
KB Financial’s American depositary receipts held up well in New York trading overnight following the ING sale and finished just 0.5% lower — in line with the 0.5% decline in its Korea-listed common shares earlier on Thursday.
Bank of America Merrill Lynch was the sole bookrunner. At least two other banks also bid for the transaction, according to sources.
