South Korean banking credits fell on Tuesday over concerns Hana Financial Group could be asked to pay up to $1.8 billion in back taxes but the broad market drifted in directionless trade after a US holiday.
Hana, South Korea's No 4 financial services firm, has been under pressure since September after a media report that the National Tax Service was considering collecting unpaid taxes from the group in relation to its 2002 purchase of a state-owned bank.
Other banking plays weakened in sympathy. On Tuesday, JoongAng Ilbo daily reported the size of the back tax was estimated to be as high as 1.7 trillion won ($1.80 billion) including interest. "All the single name CDS in the Korean financial space have widened out by 5 basis points today after news that Hana may have to pay back taxes in March," said a Hong Kong-based fund manager.
Five-year credit default swaps - insurance-like contracts that protect against defaults and restructuring - on Hana Bank moved out to 240/255 basis points while Woori Bank's 5-year CDS was traded at 255/270 bps. Hana Bank, the banking arm of Hana Financial, acquired loss-making Seoulbank from the government in late 2002.
In order to qualify for tax exemption for an unprofitable company, it kept Seoulbank as an entity that technically absorbed Hana Bank, while keeping the bank's name as Hana.
Hana's shares fell by more than 5 percent on Tuesday. The broad market was steady to marginally weaker as a market holiday in the United States on Monday left investors with little direction. The popular iTRAXX Asia ex-Japan high-yield index - an important measure of risk aversion - widened by 1 to 2 basis points (bps) to 564, a trader said. Global markets would now be focused on US bond insurers as authorities are considering allowing the companies to split their relatively strong municipal bond guarantee businesses off from the problem parts of their businesses.
"The limelight is very much on these bond insurers," said a Hong Kong-based analyst. Philippine bonds due in 2032 were steady at 96.875/97.25 cents to a dollar, while bonds due in 2031 were unchanged at 110.75/111.25. But the country's five-year CDS, tightened to 234/237 bps from 237 bps.