South Korea's KEB Shares Drop on Lone Star Probe Worries

Korea Exchange Bank (KEB) fell as much as 4.4% during the intraday session on Tuesday, on worry regulators will review their approval of the lender's sale to Lone Star, but losses were pared on expectations a probe would be unlikely to strip the U.S. fund of its stake.

South Korea's audit bureau on Monday asked the Financial Supervisory Commission (FSC) to review its approval of Lone Star's 2003 purchase of the lender, saying financial data on KEB was understated to allow the U.S. fund to pay a bargain price of $1.2 billion.

The continuing wrangling over the 2003 sale is raising worries about the fate of KEB after Lone Star in November scrapped a $7.3 billion deal to sell South Korea's fifth-biggest commercial lender to Kookmin Bank. Lone Star controls 64.6% of KEB.

But analysts said the FSC was likely to wait on a ruling by a South Korean court that is also reviewing the case at the behest of prosecutors, who say the sale was illegal.

"This is a short-term issue," said Daniel Baek, an analyst at Woori Investment and Securities.

"If the court decides the sales process was illegal, then Lone Star's position on KEB could be changed. But I'm not sure if the court will issue that ruling," he added.

Either the court or the FSC can potentially declare the deal void -- a decision that could force Lone Star to dispose of shares that exceed a 10% stake in KEB.

The latest announcement by the audit bureau comes after it cleared the U.S. buyout fund in June of any impropriety but said the deal contained "flaws" that allowed KEB sold for less than its worth.

"The BoA (Board of Audit) findings do not imply Lone Star did anything 'illegal' in acquiring KEB," UBS said in a note to clients dated on Monday.

The investment house added that Lone Star has not been directly charged for wrongdoing on the original KEB purchase, raising the prospect that only the government or KEB's prior management would be found liable for any miscalculation of the lender's sale price.

UBS also cast doubt about whether Lone Star's original sale could be nullified.

However, UBS cut KEB to neutral from buy, saying the stock was approaching its fair value of 15,200 won -- with the lender up 21% since the end of January as of Monday's close -- and expressing disappointment that Lone Star may not pay out an interim dividend.

KEB shares were down 1.4% during the late morning session, compared with a 0.17% fall in the main KOSPI.

The Board of Audit and Inspection also called for sanctions such as a possible damages suit against sale adviser Morgan Stanley.