K Bank has been planning an IPO for several years. In September 2022, it passed the preliminary evaluation for a listing on the KRX. However, in February 2023 it officially decided to halt the procedure, citing suboptimal market conditions that contributed to a decline in its valuation. The Korean digital lender resumed the IPO process this year, applying for a preliminary listing review with the Korea Exchange on June 28.
Yet now, it seems likely K Bank will shelve the IPO again. On the one hand, Korean financial regulators seem to have fallen out of love with digital banks. They seem especially concerned with the online lenders’ increasing reliance on mortgages to boost profitability – a practice associated with incumbent lenders. Surging mortgages are pushing up Korea’s household debt, which was the highest among 34 developed and emerging economies analyzed by the Institute of International Finance in 2023.
K Bank has also become somewhat dependent on cryptocurrency for growth, which may prompt additional regulatory scrutiny. It is estimated that K Bank currently has about 5 trillion won (US$3.6 billion), in deposits from South Korean crypto exchange Upbit – so about 20% of overall deposits.
Market conditions, meanwhile, look iffy. While we think that concerns of a recession in the United States are overblown, the legal trouble of K Bank’s rival Kakao Bank are serious as the situation could cause investors to have doubts about digital banks in general. Its parent company’s founder Kim Beom-su was arrested on July 23. He has been accused of manipulating stocks during Kakao’s acquisition of the K-Pop agency SM Entertainment last year.
Analysts in Korea warn that while the country’s Supreme Court may need two to three years to issue a final verdict, the arrest of Kim suggests that at least one or two of the involved individuals are likely to receive prison sentences. If that happens, Kakao Corporation will be penalized given that South Korean law has a joint penalty provision that states if an executive or related firm violates the law, the corporation is also punished. A potential penalty for Kakao would be the separation of its banking unit from the parent organization.
Thus far, Kakao Bank’s stock price has not been significantly impacted by the arrest of Kim, but that may change if more evidence of wrongdoing emerges. The payment unit of Kakao, Kakao Pay, meanwhile, has lost 9% of its market capitalization in the past month.