KEB under fire for paying record dividend to Lone Star

Korea Exchange Bank`s decision to pay out a record interim dividend to its biggest shareholder Lone Star despite warnings from financial authorities has led to questions over the lender’s long-term growth.

Fears are rising that the U.S. private equity fund’s receipt of a massive dividend could undermine the corporate value of the Korean bank, which is already suffering from reduced competitiveness. The decision has also ignited strong criticism that the fund is trying to exit the Korean market after a huge payday, casting a cloud over the government’s attempt to sell Woori Financial Group.

○ Decline in competiveness inevitable

The bank`s board of directors decided Friday to pay an interim dividend of 1,510 won (1.42 U.S. dollars) per share to Lone Star for the second quarter, the highest quarterly dividend paid by Korea`s fifth-largest lender. The amount is 50 percent more than 1,085 won (1.02 dollars) per share Korea Exchange Bank paid last year, meaning the bank decided to use its profits to pay dividends instead of saving them for future growth.

Korea Exchange Bank has paid an average 45.35 percent of net profits as dividends since 2006, three times the rate of other commercial banks over the same period. When the lender sells Hynix Semiconductor in this year`s second half as planned, hundreds of millions of dollars earned from the sale can also be used to pay interim dividends to Lone Star.

Listed companies generally pay a certain portion of net profits to shareholders as dividends and set aside the remaining amount as reserves. Chances of investment are reduced in the event of a smaller amount of reserves.

The decline in Korea Exchange Bank’s competitiveness after its acquisition of Lone Star is evidenced by data. According to the Financial Supervisory Service, the lender’s market share in total assets fell to 8.3 percent last year from 8.7 percent in 2003, just before the acquisition took place.

The share of foreign currency lending, the main driver of the bank`s competiveness, declined from 21.2 percent to 17.6 percent over the same period. Net profit was 198.6 billion won (1.86 billion dollars) in the first quarter, down 32.7 percent from the previous quarter.

Strikes also cast a cloud over the lender’s growth potential. Since November last year, when Hana Financial Group presented an acquisition proposal for Korea Exchange Bank, the bank’s union has sent strike guidelines to unionized workers.

According to the guidelines, the union selected 105 “cyber guards” for systemic and efficient promotion of online strikes in March. The guards` duties included spending more than half of their work communicating with the general public through Twitter and telling them of the unfairness of Hana’s acquisition of Korea Exchange Bank.

Another 900 people were ordered to click on “recommended” menus on Internet portal sites and write comments there. The execution of the duties was also monitored regularly.

A union source denied any forcing of the actions, however, saying, “Employees voluntarily wrote comments on portal sites and Twitter.”

○ Private equity funds ineligible for banks’ long-term operations

Lone Star’s payout and Korea Exchange Bank’s decline are casting murky prospects over the Korean government’s attempt to sell Woori Financial Group. Three private equity funds -- TStone, MBK Partners and Vogo Fund -- have expressed interest in acquiring a controlling stake in Woori, but none of them are under a financial holding company.

Negative sentiment toward a private equity fund’s acquisition of the financial behemoth is also rising. A private equity fund is classified as industrial capital and invests for short-term profit gains instead of long-term corporate growth.

The view is that such a fund is not committed to the growth of the Korean financial industry, which is one of the government’s three principles for privatizing Woori Financial Group.

Hongik University economics professor Jeon Seong-in said, “Since the inherent value of private equity funds is the realization of short-term capital gains, such funds are ineligible to take part in bank operations, which need a long-term perspective.”

redfoot@donga.com