KDB's Privatization Drive

It's up to the government, the bank's major stakeholder, to choose between an IPO or M&A

The Korea Development Bank is considering listing its stock on the Korea Exchange sometime next year based on its judgment that it should build a base for privatization through an initial public offering (IPO) if expanding its deposit-taking base is uncertain through an M&A.
But it will depend on the financial authorities' approval, as it is a government-run financial institution, according to financial industry sources recently.
It was learned that the Ministry of Strategy and Finance (MOSF) and the Financial Services Commission (FSC) have been holding working-level meetings on the IPO of KDB as a means to privatize the government-owned bank.
KDB appeared to have changed its original privatization plan to undertake an M&A first in order to expand its deposit-taking base and then list its stock on the market, but it has decided to push for both an IPO and an M&A. Management seemed to have decided that KDB should have some concrete results so the next government would not change the privatization plan. The privatization of KDB was among the pledges made by the Lee government.
Chairman Kang Man-soo has been taking direct charge of the privatization plan since his inauguration as chairman in July. Kang has been courting such global behemoths as Goldman Sachs and JP Morgan to see if they are interested in KDB's IPO.
High-ranking officials of KDB Financial Holdings said KDB would go ahead with the IPO early next year if the government approves the move, ruling out the free IPO and the listing of its shares on overseas stock exchanges. The state-owned bank is expected to offer 362.6 million shares during its IPO.
In the second quarter, KDB's capital amounted to 23 trillion won. Its market capitalization could amount to anywhere from 11.5 trillion won to 20.7 trillion won when its stock is listed, considering that the price-to-book ratio among the banks ranges from 0.5 to 0.9. KDB's capital is on the same level as that of Shinhan Bank with 21 trillion won and KB Financial with 16 trillion won. KDB's market value may not be able to match the average market value of those banks due to its shortcomings in the deposit-taking capacity and the government's ownership.
The government might have to readjust its plan for the privatization of KDB, as its original plan to merge it with Woori Bank has failed to materialize and it is hard to tell the exact timing for mergers with domestic banks.
The Audit Office pointed out that the privatization plan for KDB has been delayed due to the absence of a firm plan on the part of the government for the move and urged the FSC to draft a detailed plan as soon as possible including how to go about it and strategies to push it through.
The MOSF directly and indirectly owns a sizable stake in KDB and is strongly in support of the IPO.
According to the budget plan submitted to the National Assembly by the ministry, the government is expecting to earn 900 billion won through the sale of its stake in KDB when its IPO is undertaken. An IPO is the only way for the government to earn cash by selling its stakes if an M&A is not big enough, government financial officials said.
On the other hand, the FSC is somewhat against the IPO for KDB. FSC officials said if the KDB share price at the IPO is lower than the book price of KDB shares owned by the government, the government could get blamed for selling them for a discount, and an IPO can be discussed at a later time, they said.
Financial circles feel that the government should make its decision on the KDB IPO before the year is out, as it takes from six to eight months to prepare for an IPO. According to the Korea Development Bank Law, the government should start the privatization of KDB by May 2014, even by selling a share to kick off the move. nw

Chairman & President Kang Man-soo of the KDB Financial Group.
Photo on courtesy of KDB