Lender's stock drops in London as placement to finance takeover raises concern about share dilution Standard Chartered Bank has agreed to buy all the shares of Korea First Bank for US$3.3 billion ($25.74 billion) in the group's largest acquisition to date, making South Korea its second-largest market by assets. The bid for Korea First, the country's seventh-largest bank, was the second attempt by Standard Chartered to buy a Korean lender in less than a year. In May last year, it lost to Citigroup in the race to acquire KorAm Bank, Korea's sixth-largest lender. 'The key to this deal is that we have built a bigger presence in South Korea, which is the world's 10th-largest economy with over 4 per cent of gross domestic product growth last year,' group chief executive Mervyn Davies said in a teleconference from London. The announcement also marked an end to a bidding war between Standard Chartered, which made more than 25 per cent of its profit in Hong Kong in the first half of last year, and HSBC Holdings, which has again failed to win control of Korea First after losing an earlier bid to Newbridge Capital, the United States-based fund that owns 49 per cent of the bank. Last month, Newbridge was believed to be on the brink of announcing a deal with HSBC, which had reportedly tabled a US$2.6 billion bid, only to be stopped by a sudden intervention from Standard Chartered. The rest of Korea First is owned by the government. The price that Standard Chartered has agreed to pay represents 1.87 times the book value of Korea First. While some analysts expressed doubt over the price - comparing it to the 1.8 times paid by Citigroup for KorAm - others saw the lower than average non-performing loan ratio at Korea First as an important asset. CLSA banking analyst Dominic Chan said he believed the 1.4 per cent of bad-debt ratio at Korea First - against an industry average of almost 2.9 per cent - was a key reason Standard Chartered was willing to pay a premium. 'It is very important that Korea First has a large mortgage portfolio, which makes it less vulnerable should the loan quality at small and medium-sized enterprises in South Korea go bad in the near future as many people fear,' Mr Chan said. Standard Chartered said the acquisition, expected to be completed by May, would be financed partly by a placement of 117.9 million shares to raise up to #1.09 billion in London. The shares will be priced at between #9.15 and #9.25. Shares of Standard Chartered was off 2.83 per cent at #9.26 in London late afternoon trade yesterday, as investors reacted negatively to the size of the placement. Several Hong Kong-based analysts expected the fall to continue when trading of the shares in Hong Kong resumed this morning. Francis Lun, a general manager at Fulbright Securities, said he expected Standard Chartered's price to fall about 5 per cent at the start of trade. Tung Tai Securities associate director Kenny Tang Sing-hing was more upbeat about the group's long-term development, saying that he believed the massive sell-off had little to do with the price Standard Chartered paid for Korea First. 'A 10 per cent share placement will mean a very large dilution to the shares, which explains what happened to the share price,' Mr Tang said. 'But in the long term I think the deal will be positive for the bank as continual expansion is almost mandatory for any bank trying to survive in the market.'