April 20, 2024

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Korea’s non-banking industry is cited as one of the few sectors that may weather current unfavorable financial business circumstances such as slowing asset growth and rate hikes.

More specifically, the credit ratings of non-banking lenders are expected to stay afloat, in contrast with other financial institutions such as brokerages, credit card firms, savings banks and life insurance companies, according to Korea Ratings in December.

Such an upbeat outlook sparked anticipation that Lotte Capital, the non-banking lending arm of Korean-Japanese retail conglomerate Lotte, would find the right buyer. 

The Lotte World Tower in Jamsil, southeastern Seoul (Lotte Property & Development)

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As part of streamlining measures and regulatory compliance, Lotte is looking to offload its shares in Lotte Capital, Lotte Card and Lotte Non-Life Insurance by November this year.

Adding to the enticement was the fact that unlike credit card companies or insurers, the new owner of Lotte Capital would be exempt from government screening for gaining regulatory approval.

The price tag for acquiring Lotte Capital -- whose net profit surged nearly 60 percent in three years until 2017 -- is estimated to be 1.5 trillion won (US$1.34 billion).

Despite the rosy future, Korea’s top banking entity Shinhan Financial Group declined to join the preliminary bidding that closed on Feb.12.

KB Financial Group was the only financial behemoth led by a commercial bank to place a bid. As widely anticipated, Hana Bank and Woori Bank also opted out of the race.

Details of the bid, as to how much stake KB would like to acquire, will remain confidential until the preferred bidder is selected in April or later.

The transaction will involve more than a 40 percent stake in Lotte Capital owned by Korean holding firm Lotte Corp. and Lotte Engineering & Construction.

The shares must be sold under Korea’s Monopoly Regulation and Fair Trade Act, which obliges non-financial conglomerates with a holding company in Korea to sell off financial units within two years after introducing a holding company structure. Lotte adopted the structure in November 2017.

Last-minute withdrawal

Hours ahead of the preliminary round, the cat was already out of the bag that Shinhan Financial had walked away on concerns about “possible overpayment” in the high-profile deal managed by Citigroup Global Markets Korea Securities.

The reports came as a surprise, since Shinhan Financial, led by commercial banking subsidiary Shinhan Bank, had expressed a strong intention to compete for Lotte Capital, and selected Merrill Lynch’s Seoul Branch as the adviser.

Along with the possibly of overpaying, Shinhan Financial seems to have struggled with the fears of tainting its reputation, which can happen when an entity acquires a non-banking lender that provides consumer loans with high interest rates.

“Brand value matters for financial groups in Korea,” said Choi Chung-uk, an analyst at Daishin Securities.

Lotte Capital’s revenue sources range mostly from corporate, personal and car purchase installment loans. As of September, installment loans for car purchase and corporate loans took up 31.5 percent and 36.1 percent, respectively, of the firm’s outstanding loans, according to Korean rating agency NICE Investors Service. Credit score-based consumer loans, with relatively higher interest rates than the former, accounted for 29.9 percent.

Nearly half of those taking out personal loans borrow at an annual interest rate of over 20 percent, according to Lotte.

“Loan products with high interest rates could have a negative effect on financial groups' (reputation), so a lender is subject to changes in the business model when the owner change hands,” Choi said.

One man’s poison, another man’s meat

For KB Financial, however, attaining Lotte Capital means a much-needed diversification in its business portfolio -- especially since it forfeited its No. 1 position in terms of net profit to Shinhan Financial last year.

For its subsidiary KB Capital, which is focused mainly on car installment loans, it can secure a foothold as the No. 2 private financing company in Korea with the acquisition of Lotte Capital, which is the fourth-largest with total capital of 7.5 trillion won.

Lotte Capital also may want to be bought by KB Financial, since being owned by a private equity firm may dampen its credit ratings, industry watchers said.

MBK Partners, Hahn & Co. and Orix Private Equity Korea are among the other bidders.

Under KB, Lotte Capital’s current AA- rating endowed by Korean rating agencies including Korea Ratings may remain unchanged. AA- is also the rating given to KB Capital.

The opposite will occur if a profit-seeking PEF takes over, said Kim Min-jung, an analyst at Hanwha Investment & Securities.

“If a PEF becomes a major shareholder of Lotte Capital, there are limited possibilities of credit rating improvement due to attempts to resell shares,” Kim wrote in a note on Feb. 12. “But if a financial group buys shares of Lotte Capital, there is room for further improvement.”

KB Financial has not yet made plans to team up with PEFs and form a consortium, said the group’s spokesperson.

By Son Ji-hyoung (consnow@heraldcorp.com)