Banking on the Korean Market…

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Since recovering from the Asian financial crisis of the late ’90s, South Korea’s banks have been on a tear. The country’s financial sector — once in the firm grip of the industrial conglomerates or chaebo — have been transformed into fast growth, commercially oriented money making machines.

Having worked on the public offerings of formerly government owned banks in Central Europe in the mid 1990s, I am convinced that banking turnarounds are one of the strongest “top down” investment themes in global bull market investing, having generated massive profits for investors from Budapest to Bombay. They are often the “10 baggers” that famed investment guru Peter Lynch sought out while running the Fidelity Magellan Fund.

The South Korean banks’ results speak for themselves. Loans to the shady chaebol have plummeted to less than 5%, while loans to consumers have soared to 56% in 2005. The average ratio of nonperforming loans stands at 1.6%, down from 12.9% in 1999. As a result, South Korea’s banking sector is expected to earn $9.5 billion in 2005, topping 2004’s record profits of $8.4 billion.

The success of the “big four” banks on South Korea (who control over 70% of the banking market) has not escaped the attention of savvy foreign investors, with foreign investors now owning a majority of the shares in three out of these four banks. Goldman Sachs recently invested over half a billion dollars in no. 4 Hana Bank, which is not publicly traded.

Though still the only bank of the four that has a majority of its shares locally owned, this week’s Global Bull Market Alert pick Woori Finance Holdings has benefited most, with both its revenue growth and share price outpacing its rivals. Cobbled together from two troubled banks in 2001, Woori today includes the second-largest commercial bank in Korea in terms of total assets (including loans), deposits and the number of branches. It also boasts two Ivy League economics PhDs (Harvard and Penn) on its Board of Directors.

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During the first stage of its turnaround, Woori focused on making employees and clients accept the very idea of credit assessment. But it is really the dynamic growth of the South Korean economy that will secure Woori’s future profits. Woori’s goal is to become nothing less than a one-stop financial supermarket, offering everything from credit cards and brokerage services to asset management and insurance.

And with revenue growth exceeding 90% in the last quarter over the same quarter the previous year — and a P/E of less than 9 — Woori’s stock is inexpensive compared with its other publicly traded competitors in South Korea.

So buy Woori (WF) at market today and place your stop at $51.00. There are no options on this one.

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