Bank Resolution Korean Cases

International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

Bank ResolutionBank ResolutionKorean CasesKorean Cases

Bank ResolutionBank ResolutionKorean CasesKorean Cases

Korea Deposit

Insurance Corporation

2007. 3. 29Taewan Chung Taewan Chung

[email protected]@kdic.or.kr


Outline of Presentation

Government-led Bank Restructuring Program

Structure of Public Funds Management

Korean Case Study I - Cho Hung Bank

Korean Case Study II – Woori Financial Group

Conclusion

Overview of the Korean Economy


Overview of the Korean Economy

KoreanKorean EconomyEconomy sincesince 19971997

Paralysis of Function of

Financial Intermediaries

Credit Crunch

Slowdown in

Overall Economy


1st Stage Bank Restructuring Program (1998)

Program Program Program Program EvaluationEvaluationEvaluationEvaluation

☞ ☞ Focus : ImprovingFocus : Improving

Bank’s financialBank’s financial

Structure to Structure to

Attract InvestorsAttract Investors

☞ ☞ Target : Banks Target : Banks

below 8% BIS Ratiobelow 8% BIS Ratio

☞ ☞ Instructed 12 banksInstructed 12 banks

To prepare businessTo prepare business

Restructuring planRestructuring plan

☞ ☞ Review : Review :

Evaluation CommitteeEvaluation Committee

☞ ☞ 5 Non-viable Banks:5 Non-viable Banks:

P & A OrdersP & A Orders

☞ ☞ 7 Viable Banks :7 Viable Banks :Conditional ApprovalConditional Approval

ProcessProcessProcessProcess


2nd Stage Bank Restructuring Program (2000)

Program Program Program Program EvaluationEvaluationEvaluationEvaluation

☞ ☞ Focus : EnhancingFocus : Enhancing

The competitivenessThe competitiveness

Of financial industryOf financial industry

☞ ☞ Target : Banks Target : Banks

below 8% BIS Ratiobelow 8% BIS Ratio

Or injected PublicOr injected Public

Funds at 1Funds at 1stst stage stage

☞ ☞ Instructed 6 banksInstructed 6 banks

To prepare futureTo prepare future

business plansbusiness plans

☞ ☞ Review : Review :

Evaluation CommitteeEvaluation Committee

☞ ☞ 4 Non-viable Banks:4 Non-viable Banks:

Public FundsPublic Funds

☞ ☞ 2 Viable Banks :2 Viable Banks :Independent SurvivalIndependent Survival

ProcessProcessProcessProcess


Structure of Public Funds Management

Review of the appropriateness of disposal of assets

held by the Government and its Agencies

K D I CK D I C

Sub-CommitteeSub-Committee

PFOCPFOCSupervision & Planning of Public Fund

Management including assets disposal

Disposal and Recovery of assets

acquired in Restructuring process


Korean Case Studies

Case Study I - Cho Hung Bank (CHB)

Case Study II – Woori Financial Group (WFG)


Privatization of CHB

Decision Decision

of PFOCof PFOC

(Aug.’02)(Aug.’02)

Decision Decision

of PFOCof PFOC

(Aug.’02)(Aug.’02)

Selection Selection

of FAof FA

( Sep.’02)( Sep.’02)

Selection Selection

of FAof FA

( Sep.’02)( Sep.’02)

Dispatch Dispatch

of TL & IMof TL & IM

(Oct.’02)(Oct.’02)

Dispatch Dispatch

of TL & IMof TL & IM

(Oct.’02)(Oct.’02)

‘ ‘Plans for disposal Plans for disposal

of bank shares heldof bank shares held

by KDIC’by KDIC’

Priority : Strategic Priority : Strategic

Investors, Investors,

Partial sale in the OTC Partial sale in the OTC

RFP : 14 overseas,RFP : 14 overseas,

6 local IBs6 local IBs

“ “Morgan Stanley & Morgan Stanley &

Samsung Securities” Samsung Securities”

Consortium chosenConsortium chosen

Contacted 88 investorsContacted 88 investors

TL to 47 investorsTL to 47 investors

IM to 15 investorsIM to 15 investors

STEP 1STEP 2

STEP 3



PreliminaryPreliminary

BidBid

(Oct.’02)(Oct.’02)

PreliminaryPreliminary

BidBid

(Oct.’02)(Oct.’02)

Due Due

Diligence Diligence

(Nov. ’02)(Nov. ’02)

Due Due

Diligence Diligence

(Nov. ’02)(Nov. ’02)

Final Final

BidBid

(Dec. ’02)(Dec. ’02)

Final Final

BidBid

(Dec. ’02)(Dec. ’02)

8 Investors8 Investors

Short List(4) : SFG, Short List(4) : SFG,

Cerberus , ABN-Amro, Cerberus , ABN-Amro,

Shinsei Shinsei BBankank

one monthone month

Interrupted by BankInterrupted by Bank

Labor UnionLabor Union

2 Investors2 Investors

SFG, Cerberus SFG, Cerberus

Consortium (Shinsei Consortium (Shinsei

Bank, KFB)Bank, KFB)

STEP 4STEP 5

STEP 6



Maximize the size of PublicMaximize the size of Public

Funds to be recoveredFunds to be recovered

Retain a 3Retain a 3rdrd Party to review Party to review

Selling price & utilize theSelling price & utilize the

results for the negotiationresults for the negotiation

Review by Sub-Committee(Dec.’02)Review by Sub-Committee(Dec.’02)Review by Sub-Committee(Dec.’02)Review by Sub-Committee(Dec.’02) Selection by PFOC(Jan.’03)Selection by PFOC(Jan.’03)Selection by PFOC(Jan.’03)Selection by PFOC(Jan.’03)

Evaluation of Evaluation of

AcquisitionAcquisition

terms & conditionsterms & conditions

TThe merger of CHBhe merger of CHB

and its Buyerand its Buyer

Synergy EffectSynergy Effect

Enhancement of Int’lEnhancement of Int’l

competitiveness of competitiveness of

banking industrybanking industry

STEP 7 STEP 8



EvaluationEvaluation

By the 3By the 3rdrd

PartyParty

EvaluationEvaluation

By the 3By the 3rdrd

PartyParty

Negotiation Negotiation

With SFG With SFG

(May ’03)(May ’03)

Negotiation Negotiation

With SFG With SFG

(May ’03)(May ’03)

Approval Approval

By PFOCBy PFOC

(Jun. ’03)(Jun. ’03)

Approval Approval

By PFOCBy PFOC

(Jun. ’03)(Jun. ’03)

2 months by Shinhan 2 months by Shinhan

Accounting firm Accounting firm

NAV : KRW 2,385 NAV : KRW 2,385

Intrinsic Value: Intrinsic Value:

KRW 5,929~ 6,967 KRW 5,929~ 6,967

6 weeks6 weeks

Based on valuation of Based on valuation of

33rd rd PartyParty

KDIC, report toKDIC, report to

PFOC (Jun.,’03)PFOC (Jun.,’03)

Signed SPA on Signed SPA on

Jul. , 2003Jul. , 2003

STEP 9STEP 10

STEP 11


Implications

Landmark Transaction in terms of Sale PriceLandmark Transaction in terms of Sale Price

Recovery higher

than Injection 3.6+0.8 > 2.73.6+0.8 > 2.7(Unit : KRW Tn)(Unit : KRW Tn)

84% premium

on the book value( KRW 3,375 p/s)

56% premium on

the trading price(KRW 3,980 p/s)


Implications

Improved Competitiveness of BankingImproved Competitiveness of Banking IndustryIndustry

Competition

among local banks

The Merger of CHB

& Shinhan Bank

The 2nd largest bank

(Total Assets : KRW163 tn)

Entry of leading

foreign banks


Korean Case Studies

Case Study I - Cho Hung Bank (CHB)

Case Study II – Woori Financial Group (WFG)


Privatization of WFG

Stocks of the 5 banks

WFG’s stocksCapital Injection

5 insolvent banks

Stocks of the 5 banks

Establishment of WFG

1

23

4



Initial Public Initial Public

OfferingOffering

(June.’02)(June.’02)

Initial Public Initial Public

OfferingOffering

(June.’02)(June.’02)

90 million shares (including 36 million

new shares) Recovered $ 367 million

Sold 11.8% stake

KSE Listing

Block SaleBlock Sale

(Sep, ’04)(Sep, ’04)

Block SaleBlock Sale

(Sep, ’04)(Sep, ’04)

45 million shares Recovered $ 324 million Sold 5.7% stake Discount rate : 3%


About MOU

Object : rapid business normalization

Structure : financial targets*

non-financial targets

Inspection : every quarter

Failure of MOU targets → sanctions

No interference of WFG’s daily business

MOU Targets

Financial targets (6 sectors)

: CAR, ROA, Cost-income ratio,

NPL ratio etc.

Non-financial targets

IT integration

Standardize work process

* They set up with consideration of domestic leading banks’ performance


1. Establishment of WFG2. MOU management



In the futureIn the futureIn the futureIn the future

Sale of controlling

stake

Gradual

monetization of

minority stake

through market

trade (i.e. block

sale)

Sale of controlling

stake

Gradual

monetization of

minority stake

through market

trade (i.e. block

sale)

Up to nowUp to nowUp to nowUp to now

After 2 sales,

KDIC’s

ownership

changed from

100% to 78%

After 2 sales,

KDIC’s

ownership

changed from

100% to 78%

Challenges

Time limit for privatization

(Financial Holding co. Act) Current deadline is for

full WFG privatization is April 2008

Ownership limit on financial holding co (FHC Act) Industrial capital can

hold only up to 4% of WFG’s voting shares


Implications

Selection of effective turnaround process

Platform for Surplus in Public Funds Recovery

Injected amount(A)

Recovered amount(B)

Estimated recovery

amount(C)

Surplus retrieval

(B+C-A)

$ 12.8 bn $ 0.7 bn $ 14.7 bn* $ 2.6 bn

* 628,458,609 shares × 23,400won(’07.3.20)

- Establishment of holding company to build scale and platform to become a leading financial service institution- Ensure early turnaround through transparent and rigorous MOU management


Thank you !Thank you !

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Bank Resolution Korean Cases

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