Woori Bank’s privatization likely to remain challenging over the next quarters

On 17 August, Korea’s Public Fund Oversight Committee announced that only one bidder submitted a preliminary bid to acquire the government’s stake in Woori Finance Holdings Co. Ltd. (WFH, A2 stable), the parent of Korea’s second-largest bank, Woori Bank (A1 stable, C-/Baa2 stable).

As a result, the government indicated that the bidding process is unlikely to proceed, as it wants at least two bidders to ensure it is effective.

Delaying privatization and maintaining government ownership weakens the bank’s competitiveness and is credit negative for Woori Bank.

Since the government’s ownership in 1999, the bank has had a new chief executive officer every two or three years, a move that contributed to instability in governance and business strategy.

For example, under Young-Key Hwang, who was the CEO between 2004 and 2006, the average 18.9% annual growth of Woori’s loan receivables was substantially higher than the 8.7% average of all the domestic commercial banks and was one of main reasons for the deterioration in Woori’s net interest margin and asset quality.

By 2006, the bank’s net interest margin deteriorated to 2.6% (industry average: 2.6%) from 3.2% (industry average: 2.6%) in 2003. Its problem loan ratio of 2.4% in June 2011 was one of the highest among domestic banks. The average problem ratio for domestic banks was 1.7%.

Moreover, the government ownership does not translate into more government support for the bank compared with its domestic peers. The bank does not derive any material benefit from the government ownership; additionally, the government supported all the commercial banks equally throughout the global financial crisis that began in late 2008. This reflects Woori’s commercial bank status with no public-policy mandate.

In the latest bidding process for privatization, none of the major domestic banking groups participated, presumably because of the huge funding requirement. Korean laws require a financial holding company to own a stake of at least 95% in another financial holding company. And, this would mean that other banking groups would need to pay $8.5 billion (KRW9.3 trillion) at least.

In June 2011, the government’s attempt to lower the floor to 50% failed, as some politicians were against creating a mega bank or regarded a revision in laws governing the ownership of financial holding companies as favoring KDB Financial Group, whose chairman Kang Man-soo is a close ally to Korea’s current president Lee Myung-bak.

Several domestic banking groups had shown a strong interest in buying stakes only in Woori Investment and Securities Co. Ltd. (Baa2 stable) or Kyeongnam Bank (A2 stable; D+/Baa3 stable) rather than the entire group because of their strategic needs or limited financing capacity. But, in May, the government reiterated that it wants to sell the group as a whole, as it viewed the separate sale of WFH’s subsidiaries as complicating the sales process.

Woori’s privatization is likely to remain challenging over the next several quarters, unless the government changes its policy priorities for bank privatization and plays a stronger role in building a consensus among politicians in the National Assembly. For example, it is not clear to us how the government prioritizes its three objectives in privatizing banks of maximizing sales proceeds, early privatization, and development of financial services industries, when it cannot achieve all at once.

The government initiated the process to privatize WFH in May 2011 for the second time, after its first attempt to sell its 57% stake failed in late 2010.