Deal focus: Affinity, Baring leverage market dislocation

Korean banks have been among the best performing investments for private equity in Asia, but until recently, AVCJ Research had records of only two deals – worth about $300 million between them – in the past 15 years involving a foreign GP and a local bank or bank holding company.

Nearly $1.2 billion has been committed across two more deals in the past three months. First, The Carlyle Group subscribed to a KRW240 billion ($200 million) convertible bond issued by KB Financial Group. Then Affinity Equity Partners and Baring Private Equity Asia agreed to invest KRW1.16 trillion in Shinhan Financial Group earlier this month.

Affinity and Baring bought 20.4 million shares and 18.7 million shares, respectively, each paying KRW29,600 per share. The two investors were brought in because individual foreign investors are unable to own more than 4% of a bank. Shinhan ran a process with KKR and CVC Capital Partners, the other bidders, according to a source familiar with the transaction.

“Stakes in listed banks are mature, uninteresting investment vehicles. But every 10 years, when there is a crisis, it’s good to buy a bank. Their share prices get crushed and they trade well below book,” says a source familiar with the transaction. “If you had bought many of the Asian banks during the Asian financial crisis, you would have made 10x. During the global financial crisis, an investment in Morgan Stanley would have got you 7x, Goldman Sachs 5x and Citigroup 12x.”

This is Affinity’s first investment in a bank or bank holding company, though it came close to buying a stake in Woori Bank in 2008-2009. Baring took the leap in the wake of the Asian financial crisis, participating alongside Goldman Sachs in a $500 million commitment to Kookmin Bank in 1999.

The price-to-book (P/B) valuations of Korean banks are low by developed market standards. A study by the Korea Institute of Finance (KIF) found that the average P/B of Korea’s nine major domestic financial groups ranked 31st out of the 34 Organisation for Economic Cooperation & Development (OECD) nations at the end of last year. This ratio had fallen to 0.41 from 1.18 in 2010, with the KIF blaming regulation rather than poor business performance.

With the onset of COVID-19, bank stocks plummeted, and ratings agencies revised their assessments of creditworthiness of Korea’s largest commercial lenders from stable to negative. P/B ratios took a hit: Shinhan is trading at 0.35, down from 0.57 at the end of last year; KB Financial has fallen from 0.48 to 0.36; Woori Financial Group from 0.39 to 0.27; and Han Financial Group from 0.40 to 0.28.

While the ratings agencies have warned of protracted downward pressure on asset quality and profitability for the broader banking industry, Affinity and Baring appear to be backing the major players to pull through. “Their loan books were cleaned up years ago and they are heavily capitalized. They have decent ROA [return-on-assets] and ROE [return-on-equity] but the share prices have gone down 30%,” the source added.

Shinhan noted the importance of third-party capital in terms of shoring up equity levels and strengthening loss absorption capacity, but this investment opportunity helps address another strategic agenda: overseas expansion. Shinhan is already the largest foreign bank in Vietnam, it has bought two lenders in Indonesia, and more Southeast Asia assets are said to be in its sights.

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• Topics
• North Asia
• Financials
• PIPEs
• South Korea
• The Carlyle Group
• Affinity Equity Partners
• Baring Private Equity Asia