KEB reluctant to lend to Hynix

"KEB, as in the case of many other creditors, would be reluctant to give new financial lending to Hynix. ... The government can't ultimately force us to make decisions."

Hans-Bernhard Merforth, head of international operations at Korea Exchange Bank

Korea Exchange Bank said it doesn't want to increase lending to Hynix Semiconductor Inc after its exposure to the ailing chipmaker made its shares the second-worst performing bank stock in three months.

Hynix, the third-biggest memory chipmaker, has been kept afloat so far by creditors, many of which are controlled by the government. KEB, 33 percent owned by Commerzbank AG of Germany, is 43 percent owned by the government, potentially putting a decision to stop lending out of the bank's control.

"KEB, as in the case of many other creditors, would be reluctant to give new financial lending to Hynix," said Hans-Bernhard Merforth, who runs KEB's international operations. Asked about state interference, he said, "the government can't ultimately force us to make decisions. "Our first duty is to our customer and our shareholders." KEB shares, down 3.7 percent since May 21 compared with a 10.3 percent gain in the Korea Banking Index, could keep falling unless it keeps a lid on bad loans, investors say.

It set aside an amount equivalent to 80 percent of its substandard loans at the end of June, almost double the 44 percent at the end of 1999.

The stock fell as much as 5 percent yesterday, and closed 2.1 percent lower to 2,010 won.

"I'm worried that banks like KEB may have hidden sub-standard loans," said Yoo Ji-yeong, who said bank shares excluding KEB make up a fifth of the 100 billion won (US$78 million) of shares he helps manage at CJ Investment Trust Management Co.

Kookmin Bank, Shinhan Bank and H&CB have "a sound risk management system," unlike KEB, he said.

KEB recently that provisions for Hynix loans stood at 15 percent of its total lending to the chipmaker. Merforth said the bank may set aside more, depending on chip prices and other variables. The world's third-biggest chipmaker has 11 trillion won (US$8.6 billion) of debt.

Unless prices recover, Hynix may run through proceeds from a US$1.25 billion share sale in June. The spot price for the PC100, 8X8 64-megabit dynamic random access memory chip -- widely used as an indicator of demand -- has fallen 71 percent so far this year.

According to calculations by Salomon Smith Barney Inc, which arranged the share sale, if chip prices fall to an average of US$1, Hynix will have a shortage of 1.5 trillion won of cash in the second half of the year, Yonhap News said.

KEB also in the final stages of talks with Citigroup Inc and other potential bidders to sell its credit-card unit.

The bank has said previously it may list its credit-card unit should sale talks fail.

"I'm hopeful of a successful conclusion of the sale, rather than the alternative" of a domestic share sale, Merforth said. "Lawyers of the two sides are negotiating. It's a complicated deal."

The bank has an operating income target of 1.2 trillion won for 2001, up 38 percent from last year's 868 billion won. It is hoping to lure potential partners for next year, Merforth said.

"We're looking into partners for various business alliances," he said. "This could be a merger of the whole entity or just partial mergers of specific business operations."