On June 20 Korea’s financial watchdog, the Financial Supervisory Commission (FSC), told Asiamoney that it was determined to make it easier for a buyer to acquire Woori Financial Holdings, the long-up-for-sale bank that Seoul bailed out 14 years ago.
Hours later the regulator changed its mind, caving in to sustained pressure from politicians opposing President Lee Myung-bak’s administration to leave Korea’s draconian bank acquisition rules as they are.
The pull was a victory for politicians seeking to embarrass the government, but it was a major failure for the credibility of Korea’s financial-sector oversight.
It also marks the latest setback in the government’s attempts to dispose of its 57% of Woori. These efforts have recently involved the FSC trying to rope in another state-owned institution – Korea Development Bank – to bid for Woori as an artificial way to add competition to the sale.
Local politicians opposed that suggestion too, and the skittish FSC buckled once they did.
Woori is not a bad bank. It has a good retail network and in asset size it’s second to KDB in Korea – although it suffers from a lot of non-performing loans (NPLs) and a CEO at the helm who is too closely tied to the political classes.
But no bank head in their right mind is going to want to bid for the bank when the financial regulator in charge of the process flip-flops apologetically from one strategy to another at the behest of the country’s populist politicians.
As events stand, the sale of Woori is in serious doubt (again) while the protracted drama is damaging the credibility of the government’s hopes of creating a more globally relevant banking sector and promoting South Korea’s credentials as an international centre for finance.
It’s a farcical situation that could do serious damage to any such aspirations.
Single aim
The sale of Woori has lacked a clear direction from the start, burdened by a confluence of motives.
During the Asian financial crisis of 1997-1998 a set of Korean banks was on the brink of collapse and had to be bailed out by the government using taxpayer funds. Seoul spent KRW12.8 trillion (US$10.8 billion) to save these institutions, which were merged together to create Woori. The government has gradually sold down its stake since then, to its current level of 57%.
However, Woori is no longer in dire straits. Seoul’s main goal of any sale now should be to get as much value as possible for the taxpayer when selling the rest of its stake.
The FSC reinvigorated the latest round of bidding for Woori in early May, and set a deadline of June 29 for all eligible parties to express their interest. It believes that the bank is a steal at present valuations, and wanted several bidders to acquire the government’s stake.
“Woori Finance’s PBR [price-to-book ratio] hovers around 0.7,” Kim Seok-dong, chairman of the FSC, said on May 26 to journalists, claiming the stock of Korea’s largest financial group is undervalued.
Based on normal metrics Kim is correct; a PBR of less than one generally means a bank is undervalued. But some banking analysts argue in Korea this is because the banking sector is too heavily influenced by politics. And Woori’s sale is proving to be a compelling piece of evidence giving credence to such suspicions.
“Banks are not run at the behest of shareholders but for politicians,” says a Korean researcher based in Seoul. “There is evidence the government has influence over who becomes a CEO of a bank even though there’s no reason why it should...Foreign investors are aware of this activity and that’s the reason it trades at a discount.”
Certainly interest in Woori has been light, despite its low valuation. However, a lot of the reason for this dearth in demand is down to the guiding principles surrounding any sale.
According to the FSC, the sale of Woori should be conducted through a speedy privatisation that maximises profit for the taxpayer and has a beneficial impact on the market place.
Those sound like noble goals. Unfortunately the country’s own laws make them almost impossible to achieve.
The sticking point is the level of commitment a would-be buyer has to show. Under present law, any financial holding company in the world seeking to purchase a Korean holding company would have to purchase at least 95% of its shares.
Given that rule, acquiring Woori in its entirety would cost an estimated US$6 billion. That’s a sizeable chunk of change during a fragile time for the global economy. Most Western banks are retrenching and looking to shore up their capital, while few Korean lenders appear interested in, or able, to buy the company.
Wilting under the storm
To its credit the FSC did try to lower the initial hurdle to acquire Woori, announcing on May 17 that bidders could buy an initial stake of 50% and then purchase another 45% over the subsequent five years. Changing the law in such a manner only requires the president’s signature.
Unfortunately the very suggestion of dropping the acquisition level was seized on by opposition politicians. On June 15 Ooh Che-chang, a Democratic Party politician, told the FSC that if it attempted to change the law in such a manner politicians across the board would push forward with a bill that ensured that any such a decision had to be ratified by the National Assembly.
The FSC did not appear to have the stomach to create such a political furore. It recanted and said it would pursue a sale of Woori on the original terms.
Ernst Lee, a spokesman for the FSC, tells Asiamoney that the regulator “officially said at the National Assembly that we have no intention to push forward softening the overall financial holding ownership unless there is a general consensus”.
However, “we will try to persuade members of the National Assembly of the necessity of changing the decree, but if it turns out not to be possible, we will drop it”.
In other words the FSC is still trying to change the ownership rule, but it doesn’t want to appear to be doing so. That’s not exactly standing by your position.
KDB conundrum
The regulator has not just wilted under political pressure on the issue of ownership; it has also rapidly retreated from original attempts to make the bidding process for Woori more competitive.
One of the very few possible local suitors for Woori is KDB. Although the FSC never officially put the bank’s name forward as a preferred bidder it mentioned that it hoped KDB would participate in the process.
Lee told Asiamoney on June 20 that the FSC had wanted KDB involved to kick off a bidding war with other banks, and help raise the price for Woori.
But while KDB has the money to buy Woori, it would make for a controversial acquirer because it is also state-owned. Once again opposition politicians were quick to seize on this fact, arguing that were KDB to acquire it, Woori would not constitute a privatisation.
Once again the FSC buckled, stating on June 13 that it had asked KDB not to bid for Woori.
FSC spokesman Lee argues that the FSC changed its mind to allay concerns that such an acquisition would not offer value for money.
“We had a very good intention. We believed that by bringing in KDB it would trigger valid competition, but people were suspicious…we wanted to get rid of the assumption which would blur the original intention of the privatisation of Woori,” Lee says.
The FSC’s U-turn raises questions about exactly how it considered the ramifications of putting KDB’s name forward. It also appears that it did so without the explicit blessing of the bank’s management; KDB had not supplied a letter of interest in Woori to the regulator by the time it changed its mind.
The attempts to bring KDB into the process just underline the lack of interested players for Woori. Few financial institutions in the country want to buy Seoul’s stake in the bank. KB Financial Group, Shinhan Financial Group, and Hana Financial Group are Korea’s leading bank groups, yet all have consistently said they’re not interested in bidding.
Given this dearth of interest, throwing out one of the few banks in Korea that could afford, and might be willing, to buy Woori has further reduced the chance of the FSC being able to host a competitive bidding process.
Breaking up is hard to do
It now looks unlikely that the FSC will be able to host a competitive auction process, meaning the amount it could raise will not be as high – assuming there are any bidders at all.
The original deadline for submissions of interest was June 29, but Lee told Asiamoney on that date that while the FSC could not say how many banks had applied, it had not closed the submission process. That suggests interest is not strong.
Given the difficulty in getting an outright buyer for Woori, a logical alternative would be to break the bank up and sell it piecemeal.
Unfortunately the FSC has managed to shoot itself in the foot here too, stating that it won’t let Woori be cut up.
“We tried to sell Woori last December. We considered a split sell. This time it’s a total package sell. This time we are making clear we are looking for someone responsible and [an] able potential bidder,” says Lee.
Yet discounting one way to sell the bank just limits the FSC’s options even more. Given the financial and economic environment and the difficulty of selling Woori as one unit, the regulator might find it easier and more rewarding to divest various business divisions.
Doing so would also be more likely to attract multiple bidders as each part would not cost so much, helping stimulate competition and a better value for the assets.
Start all over again
The situation has done very little for the image of the Korean government or its financial regulator.
Government officials are quick to point the finger of blame at the politicians. “There are some things we can’t control – namely, the National Assembly – it is one of the barriers we have to overcome,” remarks one.
But this should not be the case if Lee’s administration had a coherent and reasonable strategy. The FSC’s numerous shifts in the face of political pressure suggest that the regulator has either not decided on the best way to sell Woori, or that it lacks the will to defend whatever approach it does prefer.
That has allowed politicians to set the agenda. The whole point of lowering the initial purchase stake in Woori was to make it easier to sell, and this is something the FSC should have made loud and clear. Instead politicians bullied the FSC into dropping this plan, which has stymied its ability to attract bidders for Woori and thus reduced the chances of it maximising the amount of money to be raised from such a sale.
The ability of Korea’s politicians to so easily affect the FSC’s decisions just adds to the red flags over the impact of politics on the regulation of the country’s financial sector. The long-running opposition of law-makers to US private equity company Lone Star selling Korea Exchange Bank for a tidy profit late last year already stands as a notorious example of how quickly Korea’s politicians can resort to populism when it comes to financial consolidation.
The June 29 deadline for submissions of interest in Woori may have been extended, but unless some of the constraints over selling the bank are eased the likelihood of a successful sale looks thin.
As things stand, the FSC won’t sell Woori in parts, it cannot lower the 95% investment threshold, and it won’t allow KDB to participate. Additionally it has demonstrated how easy it is for local politicos to affect the regulation of Korea’s financial sector to their own benefit. It’s a combination of factors that is likely to attract precious few potential acquirers.
At this point, the best thing the regulator can do is to start from scratch and show more fight against the political elements that appear to be complicating the situation.
Key to this process is for the FSC, the government, and a large quorum of opinion in the National Assembly to publicly agree upon and state the goals of privatising Woori. Asiamoney believes that these objectives should be twofold: firstly, to maximise value for Korea’s shareholders, and secondly, to come to a decision that is most beneficial for the country’s financial sector.
Once these objectives are clear, the FSC needs to formulate a credible strategy over how to sell Woori, and then stick to it even if some lawmakers complain. As part of this process, the FSC needs to do some public relations work of its own, getting the point across that politicians resistant to its privatisation attempts are stymieing the chance to offer taxpayers a return on the support they offered Woori more than 10 years ago.
The FSC would also do well to let KDB participate in the bidding process if it wishes – while making clear that the government has no hand in such a bid.
Lawmakers argue they were worried that KDB was a dead cert to purchase Woori – something that never appears to have been the case – and that this would contradict the state goal of privatisation.
However KDB’s own privatisation is set to begin in 2014, so waiting three more years to sell these assets off does not seem too much to ask, given how many years of support have been given to date.
Crucially, the FSC should also leave on the table the option of splitting Woori into parts, in case there are no sufficiently attractive bids.
A basic break-up would be reasonably easy to achieve. The group could be divided into four components: the two regional banks, Woori Bank and Woori Securities.
“You can match parts of the business to the buyers for which they have greatest value and therefore extract the greatest premium,” says Shaun Cochran, head of Korean research at CLSA. “You also get around the critical hurdle or the deal size limiting potential buyers.
“One or more of the regional banks could to go to small buyers – the existing regional banks have both expressed interest, also brokers like KIH have expressed interest if the regulators were to allow them to nationalise the [banking] licence.”
Bidders interested in buying parts of Woori or the whole bank should be allowed to express an interest either way. At least this way would offer room for some degree of competition.
There are indications the FSC is willing to be flexible, at least when it comes to KDB bidding for Woori. The FSC’s Lee tells Asiamoney that KDB could come back if it wanted to after the June 29 deadline.
“If the bidding collapses for whatever reason then maybe they can join later on,” he says.
But the FSC needs to work quickly. The sale of Woori is years late already, and the botching of the latest attempt means that it might not happen until 2012 at the earliest. The government is likely to want to have disposed of Woori before it sells KDB, so that gives it a window of a year or two in which to sell the bank.
That might be a good window anyway, as it would give Woori time to bring down its NPL level and raise its profile.
What the FSC must not do is continue to let politicians manipulate its strategy purely to embarrass the government. Such activity risks damaging its credibility and could reduce the amount of money the state stands to make from selling Woori after 14 years of support.
Korea has a largely developed economy, and it deserves an internationally respected banking system. The FSC has the power to help develop it – provided it can stick to its own objectives.