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KB Financial nears brokerage acquisition as CEO envisions South Korean Merrill Lynch

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KB Financial nears brokerage acquisition as CEO envisions South Korean Merrill Lynch

After back-to-back setbacks, is finallynearing its first acquisition of a brokerage in years, as the company's CEOenvisions transforming the South Korean banking conglomerate into a local equivalentof Bank of America MerrillLynch.

KB Financial was picked March 31 as the preferred bidder for acontrolling 22.56% stake in HyundaiSecurities Co. Ltd., the No. 5 brokerage in South Korea by assets.The banking group aims to sign a final agreement by the end of April andreceive regulatory approval by Dec. 31.

KB Financial placed a bid of about 1.1 trillion won for thestake, almost 3x its market value as of April 6, according to media reports andanalysts following the deal. The company also agreed not to cut its offer bymore than 1% after final due diligence, TheKorea Economic Daily reported April 3.

Under local rules for financial holdings companies, KBFinancial should raise its stake in Hyundai Securities to 30% within a year ofdeal closing. The group aims to hold a stake of as much as 50% in the combinedbusiness of Hyundai Securities and its existing wholly owned brokerage unit,KB Investment & SecuritiesCo. Ltd., Han Jung-ho, deputy manager in the strategic planningdepartment at KB Financial, said in an interview. He declined to confirm theterms of the company's offer.

KB Financial is a step closer to its first brokerage dealsince March 2008 after two failed attempts. The company sought to Woori Investment &Securities in late 2013 and KDBDaewoo Securities Co. Ltd. in 2015.

A takeover of Hyundai Securities would give KB Financialcontrol of the fourth-largest brokerage by assets in South Korea and help the groupdiversify away from KB KookminBank, its bread-and-butter business. Particularly, with more than 3trillion won in equity at the end of 2015, Hyundai Securities meets the minimumcapital requirement for South Korean brokerages to offer investment bankingservices. KB Investment & Securities is far below the threshold.

"The Hyundai Securities stake auction was the last goodopportunity for KB to buy a big player, and they have been hungry foropportunities to strengthen nonbanking businesses, so it makes sense they arepaying more than market expectations," said Lee Cheol-ho, a South Koreanbrokerage analyst at Korea Investment & Securities.

Yoon Jong-kyoo, chairman and CEO of KB Financial, has a morespecific goal in mind. He has publicly said on numerous occasions that he wantsto take a page from the playbook of Merrill Lynch to create an institutionoffering a full suite of banking and securities services.

Speaking to local media after KB Financial won the competitionfor Hyundai Securities, he made a Merrill Lynch reference again.

"We'll actively try a South Korean style of universalbanking, based on the successful model of BofA Merrill Lynch," he wasquoted as saying March 31 by the SeoulEconomic Daily.

Yoon thinks a combination of Hyundai Securities and KBInvestment & Securities could allow KB Financial to expand investmentbanking offerings, according to an April 1 report by The Korea Economic Daily.

With the acquisition, KB Financial could also bolster theretail side of business.

"After a merger of Hyundai with KB Investment &Securities, the first thing in KB's future strategy we can think about iscross-selling. KB can sell fund products of KB Asset Mgmt Co. Ltd. through Hyundai channels,"said Choi Jong-wook, a South Korean financial industry analyst at DaishinSecurities.

KB Financial may also have customers open Hyundai Securitiesaccounts at KB Kookmin bank branches, Choi said. Hyundai Securities had 96 branches,including 10 dedicated to wealth management, at the end of 2015.

Net profit at Hyundai Securities surged more than 600% in2015, outpacing a 91.7% industrywide increase, as earnings grew across all mainbusiness segments. Operating profit from brokerage and wealth managementservices jumped 177%, while investment banking's contribution tripled.

Following the first round of bidding for Hyundai Securities,companies in the race expressed concerns about the brokerage's activity. Theworry was that the company may have recklessly boosted lending to riskysectors, such as real estate, ahead of the auction to make its book lookbetter. Income from such transactions lifted investment banking earnings in2015.

KB Financial closely inspected all project finance itemsduring due diligence before submitting its final offer and has already setaside some provisions for them, Han said.

As of April 6, US$1was equivalent to 1,159.70 South Korean won.