Transcript HSBC_KEB_LoneStar_presentationx

HSBC’s Acquisition of KEB
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F ebu rary 20 , 20 14
Team Sap t a
ALOK CHAKRABORTY
CHRIS DONGHUI LEE
ARINDAM MANDAL
HARSH SINGH
Contents
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
Timeline of the transaction

HSBC as the Acquirer

Korean Banking Industry

Korea Country Risk

KEB as the Target

Should HSBC go ahead with transaction?
Timeline
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HSBC as the acquirer
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In 2007, HSBC’s operating income up by 25% to $87B; EPS up 17.9%
“2007 was a year when large parts of the international financial system came under
extraordinary strain. For HSBC to achieve another new high in earnings, despite these
conditions and the exceptionally weak performance of our US business, underscores
the value of the strategic focus we announced early last year to drive sustainable
growth by concentrating on the faster growing markets of the world.”
--S K Green, Group Chairman
Korean Banking Industry
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(U$M, %)
2004
2005
2006
2007.1Q
Net Income
8,800
13,600
13,600
6,600
ROA
0.85
1.27
1.12
2.05
Net Interest
Margin
2.82
3.08
2.85
2.73
Asset growth
(YoY)
5.6%
8.4%
13.9%
15.1%
(whole year)
NPL Ratio
1.9
1.22
0.84
0.85
BIS Ratio
12.1
13.0
12.8
13.0
 The banking sector emerging from the Credit card crisis in 2003.
 Strong loan growth, low NPL, strong profitability and BIS.
 Korean financial institutions unfazed by the sub-prime crisis in
2007. But outflow of foreign investment from Korean stock market.
 4.5% GDP growth expected in 2008.
Korea Country Risk
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Sovereign
 Korea rated Aa3 (78 on Institutional Investor Country Credit rating)
 Unfriendly relations with North Korea (raises political tensions
between world superpowers)
Operating
 HSBC has little experience in the Korean market, which is dominated
by local banking groups
 Bank unions
 Restrictive regulations
Financial
 Volatile currency market
 Heavy indebtedness of the households (136% debt to disposable
income) and SMEs (200% debt to equity)
KEB as the Target
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 Right candidate for HSBC because:
 Only Korean bank up for sale – Lone Star desperate to exit after 4 years
 Only bank in Korea that focused on quality asset growth (low deliqunecy)
 One of the highest Net Interest Margin (3.42%)
 17% ROE (vs. 15% normalized) and 1.5% ROA (vs. 1% normalized)
 Most global bank of Korea with maximum no. of overseas branches
 Lone Star has introduced global banking standards
 For HSBC, this acquisition will cement their presence in a fast growing
economy
 Not a right candidate because:
 Multiple court cases against Lone Star’s qualification as a major shareholder
 Regulatory hurdles involving acquisition by a foreign bank
 Strong union
Should HSBC go ahead with the deal?
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 Closing price on the day before deal was announced (Aug 31,
2007): 14,600 won
 Offer price (agreed between Lone Star and HSBC): 18,045 won per
share. The deal should be executed by April 2008, subject to
regulatory approval.
 Analyst’s fair value assessment: 15,500 won (16.4% control
premium)
 Is HSBC paying too much?
Should HSBC go ahead with the deal?
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 Closing price on the day before deal was announced (Aug 31,
2007): 14,600 won
 Offer price (agreed between Lone Star and HSBC): 18,045 won per
share. The deal should be executed by April 2008, subject to
regulatory approval.
 Analyst’s fair value assessment: 15,500 won (16.4% control
premium)
 Our “preliminary” valuation for end of 2007 using Equity method
(Abnormal Earnings): 12,769 won; Relative Valuation (P/BV):
13,274 won
 Similar valuation using Equity method for the end of 2008:
10,907 won
 Is HSBC paying too much? Have they estimated all the risks
properly?
What is the probability of regulators
approving the deal?
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What actually happened
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 In Feb 2008 lower court finds Lone Star guilty of stock price
manipulation.
 Regulators deferred approval citing legal issues.
 Jun 2008 High Court overturns the lower court’s ruling.
Prosecutor’s appeal sends the case to Supreme court.
 Contract extended until Sep 2008 and subsequently HSBC
dropped their bid same month.
 “In the light of developments around the world, not least changes
in asset values in world markets, we do not believe it would be in
the best interests of shareholders to continue to pursue this
acquisition on the terms negotiated last year”
--HSBC Asia’s chief executive, Sandy Flockhart
Thank You!
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Korean Won value against USD
KRW 1,544
KRW 1,122
KRW 1,106
HSBC dropped bid
KRW 923
HSBC submitted bid