Citigroup’s agreement to purchase KorAm Bank in late February has sparked a round of consolidation, reflecting a keen interest by foreign investors in South Korea’s retail banking sector, the third-largest in Asia after Japan and China.

The move comes as turmoil overtakes Korea’s political arena after the National Assembly voted to impeach President Roh Moo-hyun on March 12. Mr Roh has been suspended from his presidential duties and the constitutional court will decide whether to uphold the vote within 180 days.

With its 3180bn won ($2.7bn) bid for KorAm, Citigroup’s move to enter Korea’s retail banking market reflects the sector’s potential growth, setting off more competition and prompting other local players to improve their services, analysts said.

“Citigroup will force major Korean banks to upgrade their services to stay competitive but it’s not certain yet how much impact Citigroup will have,” said Sung Byung-soo, analyst at Kyobo Securities.

Kookmin Bank, the country’s largest lender, is already bracing itself for a fully fledged battle with KorAm, the sixth-largest bank, and announced a performance-based incentive system to raise the quality of staff service, said its chief executive officer Kim Jung-tae.

The bank’s initial move for an upgrade in services will focus on the 330 Kookmin branches that are located near a KorAm branch.

International lenders such as Citigroup are expected to have an advantage in targeting wealthy customers, with strong growth predicted for consumer banking.

Analysts said the next potential targets for a takeover are Hana Bank, Woori Financial Group and Korea First Bank, with Standard Chartered showing interest in a strategic stake in a domestic lender.

Standard Chartered, which launched its consumer loan operations in Korea last year, lost a bid for control of KorAm in competition with Citigroup. Although speculation is rampant that Standard Chartered will resume its takeover bid, its executives said they would not purchase a domestic lender hastily.

“We are in no rush to pursue an acquisition because we are quite comfortable with our organic growth strategy,” said Kai Nargolwala, chairman of Standard Chartered wholesale banking, at a news conference.

Citigroup is believed to be targeting at least 80% of common shares in KorAm in order to delist it from the Korean stock market.

A refusal by Standard Chartered to sell off its 9.8% stake in KorAm could complicate plans for Citigroup, which only has an agreement to buy a 36.6% controlling stake from a consortium led by US-based Carlyle Group.

Foreign investors currently hold 30% of the domestic banking sector, with US-based Lone Star Funds controlling Korea Exchange Bank, and New Bridge Capital holding a strategic stake in Korea First Bank.

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