HSBC Holdings Plc said on Monday it was in talks to buy a majority stake in Korea Exchange Bank (KEB) worth $4.8 billion from Lone Star, the latest chapter in a lengthy financial and judicial saga.

The sale process has dragged on amid a protracted legal dispute between Dallas-based private equity fund Lone Star, which holds 51 percent of KEB, and South Korean authorities.

The legal disputes forced Lone Star to cancel a $7.3 billion deal last year to sell KEB, South Korea's fifth-largest bank, to Kookmin Bank, South Korea's top lender.

HSBC, which has tried repeatedly to buy a bigger presence in the South Korean banking market, said it planned to maintain KEB's name and listing status if a deal was completed.

KEB and Lone Star declined to comment on the deal.

Foreign banks keen to enter Korea may find that acquisitions might be the only option left to them, given the South Korean government's reluctance to allow new entrants into the crowded banking sector.

Acquiring a bank is the quickest way for an outsider to establish itself in the competitive but lucrative market for financial services, including asset management, in Asia's fourth-largest economy.

Citigroup and Standard Chartered became major players through acquisitions of domestic rivals, which HSBC had also attempted to buy. South Korea is Standard Chartered's second-biggest market.

HSBC does not have strong physical presence in Korea now, it can expand its branch network and business in Korea through acquiring KEB, said Wong Kwok-wai, a banking analyst at BOC International.

Shares in KEB rose 7.3 percent to close at 13,950 won, outpacing the wider market's gain of 5.7 percent.

LENGTHY PROCESS AHEAD

Several analysts said HSBC should brace for an arduous process to get its purchase approved by South Korean authorities, with legal issues still to be resolved and the possibility of some regulatory opposition.

South Korean prosecutors say a former government official colluded with a lawyer hired by Lone Star and KEB's chief executive to inflate KEB's losses, allowing Lone Star to buy it in 2003 for around $900 million less than it was worth.

Han Jeong-tae, an analyst at Hana Daetoo Securities, said South Korean authorities may prefer local bidders over HSBC.

If KEB is sold to HSBC, it will mark a third major Korean bank bought by foreign players. The regulator won't like it very much.

But another analyst said the reported deal was highly likely to happen because the London-based global bank would be regarded as a good fit by the South Korean government, after previous KEB suitor Singapore's DBS broke off talks in June.

HSBC already has been doing banking business domestically, and seems to have a high possibility to win government approval, Goodmorning Shinhan Securities' banking analyst Hong Jin-pyo said in a note sent to clients on Monday.

An official of the regulatory Financial Supervisory Commission told Reuters it would wait for a final court ruling before giving the nod to any possible KEB sale by Lone Star.

Presumably what HSBC are offering is a clean, non-contingent cash-based exit which they certainly have the financial capacity to do, and on the other hand they'd probably want some give-up there in terms of price, said Bill Stacey, banking analyst at Credit Suisse in Hong Kong.

KEB trades on a multiple of around 8.5 times earnings, according to Reuters' data. Korea's top bank, Kookmin and the No. 2 bank Shinhan Financial Group trade on roughly the same multiple.

($1=950.1 Won)

(Additional reporting by Rhee So-eui and Lee Chang-ho in Seoul and Kennix Chim in Hong Kong)

South Korea Investment HSBC