Europe's biggest bank HSBC has long insisted it holds onto surplus capital to take advantage of opportunities when times are tough. At a time when credit market turmoil is forcing rivals to put acquisition activity on ice or sweat on funding plans, HSBC backed up its words on Monday by making a move on a near $5 billion stake in a South Korean lender.
HSBC said it is in talks to buy a 51 percent stake in Korea Exchange Bank (KEB), South Korea's fifth-largest bank. "This is good news on two fronts," said Simon Maughan, banking analyst at MF Global Securities. "They are doing what they said they'd do and buy during periods of turmoil, and secondly it solves a problem in Korea where they were looking under represented."
HSBC's interest is not a surprise as Korea has been seen as a gap in its footprint.
It has missed out on big deals to rivals Citigroup and Standard Chartered in recent years, but has said it would not rush into a deal and overpay. KEB's share price fell almost 20 percent from a peak in May to the end of last week, before jumping 7 percent on Monday after news of HSBC's talks.
HSBC, the world's fourth-biggest bank, could face competition from local banks, notably Kookmin and Hana Financial. A protracted legal dispute about the ownership of the KEB stake and regulatory issues could also derail a deal or at least delay it until next year. But the prize is an established position in the competitive but lucrative financial market in Asia's fourth-largest economy. HSBC currently has a small Korean presence, with 14 offices.
Funding the deal would also not be a problem, and HSBC could pay in cash. Recent criticism of HSBC has been that it carries too much surplus capital, estimated by some analysts at over $20 billion.
The bank has said it would retain capital to invest while its return on equity comfortably exceeds its cost of capital. The deal also chimes with HSBC's plans to focus spending on acquisitions and organic growth in Asia in the coming years.
It has been one of the most exposed European banks to problems in the US subprime housing market - at a cost of billions of dollars in bad loans - and has said the problem will take time to work through. One analyst said HSBC was likely to have pursued a deal in Korea and other gaps in its footprint regardless of the current credit market problems, although he noted that historically the bank has often bought "distressed" assets.