Why Shinhan said no to Lotte Capital’s offer

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

Specifically, the credit scores of non-bank lenders are expected to stay afloat, unlike other financial institutions such as brokerage houses, credit card companies, savings banks and life insurance companies. , according to Korea Ratings in December.

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

Lotte World Tower in Jamsil, southeast of Seoul (Lotte Property & Development)

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As part of streamlining and regulatory compliance measures, Lotte is seeking to get rid of its shares in Lotte Capital, Lotte Card and Lotte non-life insurance by November of this year.

Adding to the appeal was the fact that unlike credit card companies or insurers, Lotte Capital’s new owner would be exempt from government scrutiny for regulatory approval.

The price tag for the acquisition of Lotte Capital – whose net income jumped nearly 60% in three years to 2017 – is estimated at 1.5 trillion won ($ 1.34 billion).

Despite a promising future, Korea’s premier banking entity Shinhan Financial Group refused to join the preliminary call for tenders which closed on February 12.

KB Financial Group was the only financial giant led by a commercial bank to make an offer. As widely anticipated, Hana Bank and Woori Bank have also pulled out of the race.

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

The transaction will involve more than 40% of the capital of Lotte Capital held by the Korean holding company Lotte Corp. and Lotte Engineering & Construction.

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

Last minute withdrawal

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

The reports came as a surprise, as Shinhan Financial, run by commercial bank subsidiary Shinhan Bank, had expressed strong intention to compete for Lotte Capital, and chose Merrill Lynch’s Seoul branch as its advisor.

Besides the risk of overpaying, Shinhan Financial appears to have battled fears of damaging its reputation, which can occur when an entity acquires a non-bank lender that offers consumer loans at high interest rates.

“Brand value is important to financial groups in Korea,” said Choi Chung-uk, analyst at Daishin Securities.

Lotte Capital’s sources of income come mainly from loans to businesses, individuals and the purchase of an installment car. In September, installment loans for car purchases and business loans accounted for 31.5% and 36.1% of the company’s outstanding loans, respectively, according to Korean rating agency NICE Investors Service. Consumer loans based on credit score, with relatively higher interest rates than the former, accounted for 29.9%.

Nearly half of those who take out personal loans borrow at an annual interest rate of more than 20%, according to Lotte.

“High interest rate loan products could have a negative effect on the (reputation) of financial groups, so that a lender is subject to changes in business model when the owner changes hands,” Choi said. .

One man’s poison, another’s meat

For KB Financial, however, reaching Lotte Capital means a much needed diversification of its business portfolio, especially as it lost its No.1 position in terms of net income to Shinhan Financial last year. .

For its subsidiary KB Capital, which mainly focuses on installment auto loans, it can establish itself as the second private finance company in Korea with the acquisition of Lotte Capital, which is the fourth with a total capital of 7,500. billion won.

Lotte Capital may also want to be taken over by KB Financial, as being owned by a private equity firm could weaken its credit ratings, industry observers have said.

Other bidders are MBK Partners, Hahn & Co. and Orix Private Equity Korea.

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

The reverse will happen if a for-profit PEF takes over, said Kim Min-jung, analyst at Hanwha Investment & Securities.

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

KB Financial has yet to plan to partner with PEFs and form a consortium, the group spokesperson said.

By Son Ji-hyoung ([email protected])

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