Kitao Trapped in Korean Joker

Korean FSA Let Kitao Pick up Hyundai Swiss, and SBI Used as a Purse to Replace Korean Taxpayers’ Money.

July 20, 2013

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Something grave must be going on inside the SBI Holdings. The great leader reining the group, Yoshitaka Kitao is green around the gills, with his remarks being irregular.

For example, in June 24th, Kitao released a video announcement, just three days prior to the annual shareholders’ meeting, citing he needed to reply investors’ questions. What is the reason of such an explanation in such awkward timing? Furthermore, in the “Management Reporting Session”, somewhat casual presentation recommended by the stock exchanges following the shareholders meeting, Kitao surprisingly stated outright contradiction to what SBI has been releasing in its home pages. If his remarks on the “Management Reporting Session” were true, SBI explicitly delivered false information to the stock market. “We are in unprecedented crisis. Everything comes from that Korean bank…”. A SBI top-brass murmered these words to one of his friend.

Enormous Number for Reserves

This Korean bank is what FACTA has been pointing out SBI’s opaque investment to it, Hyundai Swiss Savings Bank (“Hyundai Swiss”). A person who is close to Korean Financial Services Agency replied to our interview: “SBI was perfectly trapped by picking up a joker bank. This joker is deeply rooted to Korean politics, so it would be difficult for SBI to exit”. Many, including us, would feel something extraordinary from these words. What is going on? Please take a look at the video releases of SBI on June 24th, and 27th. In the first video of 24th, Kitao, as if he was afraid of denouncements at the shareholders meeting, explained the numbers relating reserves on non-performing loans at the Hyundai Swiss. The reserve in December 2012 was at 45 billion yen (or 13% of outstanding loans). It increased to 79.9 billion yen (or 24% of outstanding loan), up 34.9 billion yen in March 2013.

When it decided to invest into Hyundai Swiss, SBI must have conducted full due diligence to check assets. Yet, in SBI’s releases, nothing stated on reserve needed, and only rosy remarks stated: “Hyundai Swiss is the largest savings bank in Korea with 5.5 trillion won (431 billion yen) of total assets; “Other large savings banks are all retreated from the market, thus its competitiveness is very solid”. It is obvious that the reserves need to grow fast, given the status of the slowdown of the Korean economy in property, construction, and finance. SBI, in its own account, put up 171. 6 billion yen reserves for doubtful loans in relation to Hyundai Swiss. Kitao who has a tendency to behave show-off, would never disclose such negative numbers, and we suppose the number must have been revealed by instruction from the Korean FSA. In explaining such a huge reserve numbers, Kitao said that was “very conservative figure to minimize PL impact, and to discount the future loss from doubtful loans”. He must have emphasized SBI would be all right, as it reserved such a big number, but the future looks not bright.

Now Negotiating to Buy?

“Korean economy in red light. Earnings going south in big 500 Korean firms” (Chuo Daily in May 22th). “Korean economy is worth than Asian currency crisis” (Chosun Daily May 23rd). Korean newspapers are reporting dire outlook of Korean economy. Kitao’s outlook is just a wishful thinking. In the “Management Reporting Session”, Kitao mentioned shocking remarks; “Many people suggest is it good to buy Hyundai Swiss, wondering whether we need to inject capital after capital. Thus we are now negotiating with Korean FSA and committee to buy it, and I think there is a possibility that the decision would go to Blue House, the presidential executive office”. He hints that the bargain to buy Hyundai Swiss is now under way in present from, and the decision will be very political. The name of Hyundai Swiss was planned to change to SBI Savings Bank from July 1st, but it was cancelled. Very strange, we think. In March 26th, four months ago, SBI released “Notice on acquisition of Hyundai Swiss savings Bank to consolidated subsidiary”. As titled, it was a notice that SBI finally made Hyundai Swiss as full subsidiary, after it announced the intention in the end of last year. It said that SBI not only bought Hyundai Swiss, but also its 100% subsidiary Hyundai Swiss Savings Bank III, and 60.8% subsidiary Hyundai Swiss Savings Bank IV. SBI literally completed acquisition, but Kitao says he is now trying to buy.

We should remember the words of the person familiar with Korean FSA: “SBI picked up a joker”. Korea was on a brink of a state bankruptcy in Asian currency crisis of 1997. 360 savings banks then operating in the country was reduced to 120 at the onset. It was Korean FSA’s policy target to extinguish the savings banks by 2004. Savings banks in Korea were similar to Japan’s “mujin”, or credit union, and were symbol of Korean financial weakness, accepting opaque money flow. In reality, some FSA officials accepting bribes from banks were arrested, and about 30 savings banks survived as “evils’ nest”. Beleaguered Korean FSA forcefully asked private financial companies to inherit these banks to manage.

Kim Guan-Jing, who was kicked out in the end of last year from Chairman of the Hyundai Swiss, was also a person who was forced to pull a joker by the FSA. As he borrowed paying high interest rate to by Hyundai Swiss, he needed to recover from dubious loans to his families and friends. It was not tolerable for FSA, and SBI appeared as a replacement. FSA invited SBI to join the game, and Kitao pulled the joker, attracted by “the largest savings bank in Korea”. Korean FSA was to attract Kitao by suggesting 5-year inspection holiday. But the FSA turned hardball after SBI decided to inject 20.3 billion yen in December 2012. It asked SBI to increase capital by 34.5 billion yen, which means a shortage to BIS requirements. 171.6 billion yen is also a number the FSA enforced SBI to accept. Kitao’s claim of “conservatively set aside as a reserve” is nothing but an excuse.

Installments by the End of Year Allowed

Poor SBI, falling into such a trap.

Kitao had a chance to escape from this quagmire. In December 2012, the proposed subscription of Hyundai Swiss new shares was opposed even inside of SBI. Yet, nobody can say no to the “great leader” at SBI. Yasutaro Sawada, President of SBI Securities, dubbed as “personal concierge of Kitao”, could not stop Kitao, resigned at this juncture.

With FACTA’s pinpointing reports hitting weak points, Kitao might have gotten bigotry. Or else he thought he could use his customer funds, as usual. He misunderstood Korean FSA’s tough stance. For President Park Kung-Hee, who was elected by proposing benefits to middle-class, cannot make a loss to depositors of savings banks, who are predominantly middle-low class. No way could she allow a bank managed by Japanese company to go bust, given skirmishes between Korea and Japan on history interpretation. She never can use taxpayers’ money. Korean FSA asked SBI to inject additional capital of 34.9 billion yen, but SBI prayed to pay in installments by the end of year, and accepted.

But, that is not the end of story. A trap was set that SBI became a cash dispenser for Korea, with Kitao keep on spending cash as requested by the Korean FSA. Kitao may ask Japan’s fund sponsors to pay the bill?