[ANALYSIS] Internet-only K bank pressed to delay IPO plan

Worsening market sentiment, Terra-Luna collapse force K bank to reschedule IPO plan

By Kim Yoo-chul

Korea's first internet-only bank _ K bank _ is considering delaying its scheduled initial public offering (IPO) to the latter half of next year at the earliest, according to two senior investment bank executives involved in the process.

Regarding the details of its IPO, K bank said its plan to go public in early 2023 remains unchanged, but is still subject to change based on "market circumstances."

Given the fact that the IPO process has always been directed by the top executive of a company, K bank CEO Suh Ho-sung is also tasked with ensuring investors that their expected returns from joining the IPO should be satisfactory.

"K bank is considering delaying the timing of its IPO to early 2024. That doesn't mean K bank will call off its planned IPO as it is inclined to accelerate the listing process from the first quarter of next year," one of the executives, who has a track record of managing "sizable" IPO deals, said.

K bank already chose NH Investment, Citi and JP Morgan as the lead managers for the planned IPO. In terms of ownership structure, K bank is controlled by BC Card and Woori Bank, which own 34 percent and 12.68 percent, each, as of the end of last year. BCC Kingpin LLC and Khan SS LP own 8.26 percent each, according to company data.

"Hit by the worsening stock market sentiment, the local IPO market will remain bearish throughout this year and until the middle of next year. Only after the domestic stock market sees signs of a sustained rebound will see positive sentiment in the local market. However, the one thing I want to add is that it's very unlikely that the equity market will see signs of a sustained rebound, this year, the perception of which has also been shared by top shareholders of K bank," said the second executive.

From the perspective of KT, Korea's dominant fixed-line operator, a successful IPO of K bank greater significance as the top telecom service firm is on track to transform itself into a digital-driven platform company to offset strict regulatory and market headwinds facing its traditional business structure.

Among the core reasons for a company seeking an initial public offering (IPO) is that going public lets it gain more recognition, helps it raise capital and increases price transparency and value assessment.

While there are a lot of factors to more effectively measure the success of an IPO, the following three criteria are widely viewed as the elements judging the success of an IPO: the amount of capital to be raised, share price return and level of valuation.

Last year, the Korean IPO market saw exponential growth in terms of the proportion of retail investors and total amount of capital raised throughout IPOs with Krafton and Kakao Bank raising $3.8 billion and $2.2 billion.

The key rationale for such an IPO boom was the continued quantitative monetary easing by central banks, which forced investors to search for riskier investments to achieve higher returns.

But after record-high levels of IPO activity in 2021, increasing market volatility due to Russia's invasion of Ukraine, rising raw material prices, a slowdown in China's economy, rising interest rates and high inflation are causing investors to reconsider and rethink the ideal prices they are willing to pay for stocks and planned IPOs.

Companies in high-growth sectors such as technology and fintech are becoming more cautious about going public as central banks tighten liquidity by hiking benchmark rates and concerns mount over the outlook of equity markets.

K bank CEO Suh Ho-sung
Terra-Luna collapse, crypto legislation by 2024

The U.S. Federal Reserve's decision to implement a faster-than-expected credit-tightening campaign with other major central banks following suit to absorb liquidity are making investors get cold feet about participating IPOs.

Wall Street investors are debating whether the recent stock market declines are indicators of upcoming recessions. Fund managers in Seoul said while it's too early to say businesses are anticipating an overall economic downturn, a steady decline in the share of K bank's top peer _ Kakao Bank _ may produce undesirable results if K bank goes public on schedule.

So far this year, six companies dropped or delayed their planned IPOs because of the worsening stock market situation, according to data by the Korea Exchange (KRX), the country's top bourse operator.

Shares of Kakao Bank were below 40,000 won after reaching a 52-week high of 94,400 won, according to KRX data.

"I would say the top prerequisite condition to make K bank's IPO happen this year is Kakao Bank's involvement in the solid and steady rise of its stock price," said Kim Il-tae, a senior fund manager at Meritz Securities.

The downfall of Luna-Terra also delivered a negative impact in terms of market confidence as the price movements of cryptocurrencies have been correlated with stock markets. Like stock markets, crypto markets have already been impacted by some headwinds including high inflation and interests rate hikes, which, according to a lot of analysts, have caused a sell-off in global stock markets.

A trader works on the floor of the New York Stock Exchange last week in this photo provided by the NYSE. AP-Yonhap

Why this matters more is that K bank has access to money invested in the country's top cryptocurrency exchange operator of Upbit. The two have maintained a partnership over the last few years.

In the wake of the Luna-Terra fiasco, the country's top financial regulator is soon set to launch an in-depth review of commercial banks and cryptocurrency operators to find out potential operational risks.

"Because crypto investors deposited more in K bank during a collaborative process with a cryptocurrency exchange operator, we will take a closer look into possible market risks both thoroughly and comprehensively," said an official at the Financial Supervisory Service (FSS).

Data provided by ruling People Power Party (PPP) Rep. Yoon Chang-hyun, who also serves as the chief of the party's virtual asset committee, showed some of investors' money parked in Upbit have been used by K bank for loan activities to win back more clients.

K bank's headquarters in Seoul / Korea Times file
"Because of the Luna-Terra saga, panicked crypto investors could try to pull their money out of their accounts in UPbit and that could trigger vicious and painful bank runs. Given the frosty crypto market conditions, it's necessary for K bank's shares to have more awareness in terms of ripple effects from the Luna-Terra saga and how it will also affect the crypto's entire ecosystem," said Choi Nam-kon, an analyst at Yuanta Securities.

The government plans to implement a new regulatory framework for the crypto industry by 2024 by passing the "Digital Asset Basic Act" in 2023, which is designed to better protect investors.

K bank seeks to raise between 8 trillion won and 10 trillion won from the IPO. Morgan Stanley said earlier, "To be conservative, we value K bank at 8 trillion won …. at 25% of Kakao Bank's largest market cap."

K bank swung to the black in the first quarter of this year by reporting 22.4 billion won in net profit for the first time since its establishment in 2021. It has 7.5 million customers as of March this year, according to company data.

"The lesser expected IPOs will hold better promise as the financial market will see them as having enhanced fundamentals. Because it's unlikely the stock market will see a structural rebound in the following months, there are a lot of possibilities for K bank to delay the timing of its IPO," said Hwang Sei-woon, a senior research fellow at the Korea Capital Market Institute.

When K bank initiated a paid-in capital increase campaign, its top shareholder, BC Card, had included "drag along" rights _ which gives the majority shareholder(s) the power to compel minority shareholders to participate in an acquisition on equal terms _ to win the backing of more investors. If K bank fails to go public by 2023, BC Card could sell its holdings in K bank to third parties or purchase investors' equity through the action of call option.

Kim Yoo-chul yckim@koreatimes.co.kr

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