Bloomberg News

Deutsche Bank Loses on Korea Bond Sales Amid Ban, Charges

September 20, 2011

(Closes today’s Kospi trading in 14th paragraph.)

Sept. 20 (Bloomberg) -- Deutsche Bank AG, the world’s top manager of foreign-currency debt sales, fell in South Korea’s rankings of bond-sale managers following indictments of four employees and a six-month ban on its securities unit.

Deutsche Bank tumbled to No. 16 in arranging overseas debt sales by South Korean companies this year, from No. 4 last year and the top spot in 2009, according to data compiled by Bloomberg. Offerings managed by the German firm dropped to $423 million as of yesterday, the lowest in nine years, from $1.49 billion in the same period a year earlier, the data show.

South Korean prosecutors last month charged four Deutsche Bank employees -- three of them foreigners -- and its local brokerage unit with market manipulation that caused an equities rout on Nov. 11. The indictment, which followed a six-month ban on proprietary trading imposed in April, has cut the bank’s share of this year’s $19.1 billion in sales to 2.2 percent from 8.4 percent in all of 2010.

“The drop in the league table shows that the blow to its reputation from the incident has actually damaged business,” said Heo Pil Seok, chief executive officer of Seoul-based Midas International Asset Management Ltd., which oversees $2.1 billion in assets. “The court case isn’t a problem that will be resolved in a couple of months. The negative consequences will also drag on.”

Committed to Korea

The bank continues to “perform strongly” in Asia and is among the top three managers in the region, excluding Japan, Michael West, Deutsche Bank’s Hong Kong-based spokesman, said in an e-mailed response to queries. “The bank remains committed to the long-term development of its business in Korea.”

Deutsche Bank isn’t the only foreign financial firm in Korea beset by legal or labor woes. Lone Star Funds, a Dallas- based private equity fund, and its former local chief, Paul Yoo, face charges of stock market manipulation, which the company has denied. A Seoul court is scheduled to give its verdict next month. The case has delayed the planned sale of Lone Star’s stake in Korea Exchange Bank to Hana Financial Group Inc.

Standard Chartered Plc’s local banking unit was forced to close 43 branches, about a tenth of its outlets in the country, in July as employees embarked on the longest strike in the country’s banking history over a plan for performance-based pay. It has reopened 14 branches as of yesterday, the company said.

Worst Since 2002

Deutsche Bank, which has had operations in Korea since 1978, is headed for its worst annual performance since 2002, when it helped companies raise $233 million and was ranked No. 12 arranging overseas debt sales by South Korean companies. The firm also has lending, brokerage and asset management operations in the country, and employs more than 300 people, according to its website.

So far this year, Deutsche Bank has been excluded from the two largest sales of foreign-currency bonds to overseas investors by Korean companies, data compiled by Bloomberg show.

A $1 billion sale by Export-Import Bank of Korea on Sept. 8 was managed by HSBC Holdings Plc, Credit Suisse Group AG, Bank of America Corp., JPMorgan Chase & Co., Daiwa Securities Group Inc., Goldman Sachs Group Inc. and Woori Investment & Securities Co. The export-import bank, known as Kexim, had previously hired Deutsche Bank on two of its three biggest deals in 2010, including the $1.25 billion sale of 10-year, dollar-denominated bonds in June 2010.

Reputation Factor

A bank’s “reputation in the market” is a factor in deciding on underwriting banks, Yoon Hee Sung, a director of Kexim’s international finance department, said in response to questions.

Korea Development Bank hired Bank of America, HSBC, Royal Bank of Scotland Group Plc, Standard Chartered, UBS AG and KDB for its $750 million deal on March 2. Park Chan Ho, a spokesman for Korea Development Bank, declined to comment for this article.

The Seoul Central District Prosecutors’ Office began the probe of Deutsche Bank employees and Deutsche Securities Korea in February at the request of financial regulators following a plunge in the last 10 minutes of trading on Nov. 11 that erased about $25 billion in market value.

The benchmark Kospi Index dropped 2.7 percent when options contracts expired that day, prompting regulators to say in January that they would limit the number of equity derivatives contracts investors can hold. The Kospi rose 0.9 percent at the close of trading in Seoul today, paring this year’s decline to 10 percent.

Employee Suspended

Prosecutors said that three employees from Deutsche Bank Hong Kong and one from Deutsche Securities Korea conspired to manipulate the market by selling 2.44 trillion won of shares on the spot market that day. The actions were intended to drive down the Kospi 200 index so that the firm could profit from put options the employees previously bought, the prosecutors said.

A date hasn’t been set for the employees to appear in court for a hearing. One of the four indicted employees has been suspended, and the other three are on administrative leave, West said on Sept. 9.

Deutsche Bank denied wrongdoing in a statement on Aug. 21. The bank at the time said the prosecutor’s actions were “regrettable” and that Deutsche Securities Korea “denies the charges, which will be defended. DSK did not authorize or condone any breach of market regulation.”

Korea’s Financial Services Commission banned Deutsche Bank’s securities unit from trading shares and derivatives for its own account for six months beginning April 1, the heaviest penalty imposed on any securities company in Korea, the regulator said. Its other operations, such as debt underwriting and its takeover advisory service, weren’t part of the sanctioned businesses.

‘Better Discipline’

“Of course, Deutsche Bank operations that weren’t penalized have also been hit following the incident,” said Kim Young Do, research fellow at the Seoul-based, private Korea Institute of Finance. “Deutsche Bank lost the most important virtue of financial institutions: trust. Clients may question the internal controls at Deutsche Bank and demand that it demonstrate better discipline.”

The prosecutors didn’t identify the indicted employees and said they include citizens of Australia, France and the U.K. They said they will seek better cooperation with overseas regulators and judicial officials so they can hold foreigners responsible for stock market-related crimes, according to the statement on Aug. 19.

Barclays Plc will hire 10 people from Deutsche Bank’s South Korean brokerage unit including John Chang, its local equity chief, two people with knowledge of the plan said in June. Barclays Capital will add the employees for sales and research to expand its equity business, one of the people said at the time. Allister Fowler, a Hong Kong-based spokesman for Barclays, declined to comment last week when asked about the hiring plans.

Hiring Staff

The 10 Deutsche Bank employees weren’t part of the lender’s local derivatives trading department that was punished this year for trading irregularities relating to the Nov. 11 market drop, one of the people said.

“Losing staff to rivals can be an additional blow to Deutsche Bank’s business,” said Heo at Midas.

Deutsche Bank’s permanent staff in Korea is unchanged at just over 300 employees compared with November, while Deutsche Securities Korea has added five people since then, West said this month. The equities unit hired seven people in the last two months, of whom five have started working at the firm, he said.

“These figures point to the commitment Deutsche Bank has to its business in Korea,” West wrote.

Foreign Debt Demand

South Korean international bond sales surged after the financial crisis in 2008, with $26 billion of global bond sales in 2009, the highest level since Bloomberg began tracking the sales in 1999.

This year, Korean companies including banks and state-owned entities have issued $19.1 billion in international bonds, up 22 percent from the same period last year.

“The level of global bond issuances by Korean firms, led primarily by high-quality companies and the banks, is expected to remain elevated in the second half amid ultra-low interest rates in the developed economies,” said Kim Wanjoong, a financial market analyst with Seoul-based Hana Institute of Finance. That will “keep the cost of global debt financing relatively cheaper than won-denominated bond sales.”

--Editors: Sheridan Prasso, Chitra Somayaji

To contact the reporters on this story: Seonjin Cha in Seoul at scha2@bloomberg.net; Taejin Park in Seoul tpark31@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net Chitra Somayaji at csomayaji@bloomberg.net;


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus