J Trust, a listed Japanese financial holding company, is seeking to acquire South Korean Kyungeun Mutual Saving & Finance, reported Korea Economic Daily. The report cited industry sources as saying that J Trust is currently conducting due diligence in the privately held Kyungeun, to be completed on 11 July.
Kyungeun Mutual Saving & Finance, based in Ulsan city, has total operating assets of KRW 350bn (USD 329m) as of end of March 2011.
If you do not work in an investment bank and you are thinking - what! What are these strange names of companies that I have never heard of before?? That's ok, because I work in corporate finance in a financial institutions group and I had never heard of them until today either.
I had some vague idea of what a Korean mutual savings bank was - I always thought of them as small scale localized banks which served city and village communities, but I wasn't sure so I went to the first place I would go to find information:
1. Wikipedia
Ok, this is not usually the case but Wikipedia was completely useless this time around. Forget this source, next!
2. Korean Banking Regulator
I'll be honest, I had no idea who regulated Korean Banks. For anyone reading who doesn't even know what that means, let me give a quick example: in China banks are regulated by the China Banking Regulatory Commission (CBRC), in Hong Kong banks are regulated by the Hong Kong Monetary Authority (HKMA).
This is an easy fix though, simply google "Korean banking regulator". WHAT?! I obviously spoke too soon, because that query produces nothing. Next I tried "central bank korea" and found it - it is the Bank of Korea. Fortunately there is an English version of the site which is sufficiently comprehensive. I should drop a note here to all of you that CBRC's website is much more comprehensive in the Chinese version versus the English version of the site. This is to discriminate against non-Chinese reading bankers, obviously. Smart move by the Chinese government.
Browsing through the BoK website, the closest page I found to anything useful describing mutual savings bank was this one. It tells me that as of Sep 2010 there are 106 mutual savings banks in the country. Otherwise this was not very helpful at all. I am starting to feel a little bit frustrated.
3. Google search for news and research reports
This is something I usually like to do last, because it will never systematically give me the correct information. But I can scan headlines quite quickly to find the relevant ones, and I very quickly came across this article.
"South Korea's savings banks traditionally offer loans, often at higher interest rates than the major banks, to working-class people and companies that don't have strong enough credit or collateral to obtain loans elsewhere. In 2005, when low interest rates fueled a property boom, savings banks ramped up real-estate project financing, leaving them exposed to loan defaults in the wake of Lehman Brothers' collapse in 2008."
Final Commentary
There is a mountain of data to be collected and sorted through, but tomorrow's work can be done tomorrow. Consolidating what I have found out so far:
- Mutual Savings Banks are for the most part quite similar to commercial banks. They are also regulated by BoK but subject to slightly different regulations than commercial banks (i.e. no ownership restrictions). There are 106 of them.
- Their customer bases are generally less credit-worthy individuals, who also lack collateralizable assets
- It appears they have a bias towards real estate loans for companies and individuals, but this has yet to be confirmed with reliable statistics
- Many of them were at risk of collapsing post-2008 due to loan defaults. Several experienced bank runs. The Korean government is desperate to cushion the fall and is considering either bailing them out or facilitate stake sales to larger and more stable financial institutions
So far the rumour seems credible enough. We would obviously have to deep dive into both those companies to know more, something which I intend to do at a later date. One final thing I noticed is that the rumour quoted "total operating assets" - makes it seem likely that Kyungeun Mutual Saving & Finance (actually I now believe it should be spelt "Kyong Eun") may have a negative tangible equity position, or at least, is not sufficiently capitalized to the extent that any potential acquiror would have to inject capital in order to maintain its operations.
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