Introduction of IFRS Avoided a Write Off, but the Korean Consumer Lending Weighs .
August 20, 2013
Korea will go bust by Abenomics, British Financial Times wrote a shockingly titled article in April 25th. It was pinpointing that whereas the monetary policy of Kuroda BOJ would result in liquidity in Japan, Korean firms need to face up a headwind, further reporting the collapse of Unjing Group, ranked 35th among chaebols, which owns construction, shipbuilding, and savings banks. The article concluded the financial turmoil in banking system caused many busts in saving banks, and the regulatory body ordered shutdown of 20 plus savings banks. Nearly 4 months passed since then, and the banking woes in Korea aggravated. After that article, following 6 banks asked court for bankruptcy protection: Pusan, Cheil, Dae-il, Prime, Tomato, and Paranse,
Korean financial sector shrinkage now affects foreign banks. Standard Chartered Bank, a British bank, announced it had written down 1 billion dollar worth of goodwill at Korea Standard Chartered Bank. Many other foreign institutions are suffering from Korean finance, and now withdrawing.
Bad Trading Decision on Reprocell shares
SBI is now getting deep into Korean finance business. In August 8th, SBI announced its 1Q earnings in 1 pm, while the stock market was opening. Many people paid attention to the value of the Hyundai Swiss Savings Bank. In short, SBI agreed with the Korean FSA that it committed to underwrite new shares of Hyundai Swiss worth 21.7 billion yen by the end of August, and 16.1 billion yen by the end of December. SBI would have invested altogether 60 billion yen, along with already-invested 20.3 billion yen in March. According to SBI, Hyundai Swiss will satisfy 7% equity ratio against total assets with these new capital injection. SBI earned 16.2 billion yen net income in 1Q. The biggest contribution came from asset management, meaning a high valuation from a bio-venture Reprocell, which made an IPO in the end of June. SBI Incubation was the top shareholder, and three partnerships owned by SBI held altogether 1.1 million shares of Reprocell. Having pursued capital injection from the Korean regulator, SBI was fully mobilizing its stealth marketing team, promoted positive image of Reprocell IPO in internet. Reprocell started trading with 18,300 yen per share (closing of June 28th), and SBI’s value of Reprocell holdings reached 27 billion yen. It was supposed to be a bonanza. But in the earnings report, Reprocell was valued less 10 billion yen. SBI did not sell the vast chunk of its Reprocell holdings judged by the top who thought the price would go up. In that organization, only Yoshitaka Kitao, the great leader, can judge such decision. As of August 12th, Reprocell share price was at 8,640 yen, after the initial hype is over. As usual, he made bad trading decision.
Now, Hyundai Swiss is in trouble. Japan’s FSA started to think that it could become a diplomatic and regulatory issue between Japan and Korea. SBI is trapped in quagmire. It may continue to inject cash into the bank like cash-dispenser, as requested by the Korean FSA. SBI shareholders must be worried. One can recognize how SBI is cornered is seen from its March 2013 yukashoken hokokusho submitted to FSA (equivalent of 10-K in the U.S.). In page 101, a description on Hyundai Swiss consolidation states the savings bank has negative equity of 78.166 billion yen. As 90.3 billion yen worth of goodwill filled the dent and not depreciated, it can earn 1.8 billion yen of operating profit. In IFRS, which SBI adopted recently, the goodwill of consolidated subsidiary would be recorded as intangible assets, and no regular write down is required as in the case of the Japan accounting rule (20 years scheduled write down). Kitao adopted IFRS to use this. Yet, IFRS requires impairment test conducted by auditing firm once a year, whether earnings are created as planned. If goodwill value was impaired, an all-out loss must be revealed. Normally, the result will be submitted to the auditing firm, but in Japan IFRS is now in test period, and FSA is to survey the results. Is there any earnings projection at Hyundai Swiss which may satisfy the auditing firm? Let us examine in lieu of Delloite Tohmatsu, the SBI’s auditing firm. Kitao insisted in presentations that Hyundai Swiss can earn, relying on consumer finance. He may be dreaming that Korea is immune to lawsuits like that of Japan, and it can earn a lot.
Needs 100 years to Recover?
At Hyundai Swiss, the consumer finance and property lending would suffer from non performing loans. The former managers at Hyundai Swiss tried an all-out wager, and sharply increased consumer loans since two years ago. The consumer loan outstanding stands at 1.3 trillion won (100 billion yen). At Solomon Savings Bank, who did the same bet, had 30% of the loan turned sour, thus Hyundai Swiss must be in same situation, a financial source in Seoul told us. A veteran manager at SBI Korea advised Kitao not to comply the Korean FSA’s request to beef up capital, but Kitao did not listen. Gung-ho Kitao must have calculated that ROA 4% earnings would recover 20 billion yen in 5 years. But in reality, Korean consumer finance can only earn 1% ROA. Orix, who invested into the space early, is now struggling. If we assume further bad loans emerging, 100 billion yen injection would require 100 years of recovery period. SBI is destined to write off the goodwill. Current head of Korean FSA is renowned hardliner who used to be in charge of the consumer finance. How long can SBI comply with his requests.