U.S. fund Lone Star secured a $444.5 million payout from its controversial majority stake in Korea Exchange bank as the bank paid its first dividend for a decade despite a sharp drop in profit.
The total payout of about $688 million was only about half of market expectations, news that helped drive KEB shares up 4 percent in a strong banks sector on relief it had not paid the investment fund even more.
Lone Star had been expected to seek a big payout after an abortive attempt to sell the stake failed last year. The fund scrapped the $7.3 billion sale to Kookmin Bank after South Korean authorities stepped up a probe into the $1.2 billion 2003 deal that gave it control of KEB.
Prosecutors said in December that the original sale was illegal, understating KEB's value. Lone Star has denied any wrongdoing in the transaction.
Jason Yu, a banking analyst at Samsung Securities, expected the Dallas-based fund to extract additional dividend incomes from KEB next year, before putting the bank up for sale again. But he said 2007 dividends could be capped around the same level as last year's to maintain KEB's underlying value.
"From now on, Lone Star will focus on raising the value of KEB by increasing the bank's profitability, instead of expanding assets aggressively because that tends to increase risky assets and cut its quality capital ratio," said Yu. As part of that, KEB is most likely to cash out of share holdings in distressed companies such as Hyundai Engineering and Construction, analysts say.
KEB did not pay dividends from 1996 to 2005, arguing its capital base was smaller than rival banks' and it needed to use some profits to clean up loan losses incurred in previous years. "Considering the bank's financial health and strong capitalization, the bank's board of directors decided to pay 1,000 won per share for shareholders of record as of the end of 2006, a total of 645 billion won ($688 million)," KEB said in a statement.
The dividend decision, made at a video conference late on Thursday for its two U.S.-based directors, comes as KEB posted a worse-than-expected slide in quarterly earnings due to provisioning costs and taxes.
KEB announced a 26.0 billion won net profit for the final quarter of 2006, sharply under a consensus forecast of 126.2 billion won, according to Reuters Estimates, and down from a 759.9 billion won profit a year ago.
The board meeting via video was attended by Lone Star Vice Chairman Ellis Short and general counsel Michael Thomson, both of whom South Korean prosecutors are trying to extradite to question as part of investigations into the 2003 KEB sale to the fund.
Michael Smith, president and chief executive of HSBC Asia, responded on Thursday to speculation his bank might acquire KEB saying he would wait until the legal issues with KEB were settled.