The Financial Services Commission is about to unveil details next month about the sale of Woori Finance Holdings, which will include whether the state-run financial institution will be sold in complete unit or separately. The nation’s top financial regulator confirmed on May 5 that the sale proposal of Woori will be disclosed in June this year and added that a preferred bidder for the company will likely be chosen in the first half of next year. Due to the huge size of the deal and its heavy influence on local financial industry, now all eyes are on the government’s management of privatizing Woori.
Woori Financial Holdings, the mother company of 10 subsidiaries including the nation’s no. 2 Woori Bank, came under the government control when the state-run Korea Deposit Insurance Corp. took role in bailing out lenders in the aftermath of late 90s’ Asian financial crisis. Through series of block sales, the KDIC has reduced its 100 percent stake in the financial giant to 57 percent since 2002. But as the market value of the remainder reaches as high as 8 to 9 trillion won, the government is weighing over the choices of whether it will split up the group or sell it in complete unit although it can be more complex.
Considering the Lee Myung-bak administration’s thirst for a mega bank or a super-size bank, the majority in financial market have guessed that the government would sell the group in full size to one of local leading financial firm. Since before the financial crisis triggered by the U.S. mortgage market, the government had focused on making mood for a mega bank to emerge by adjusting financial regulations. Also, local banks’ movements to grow their size have fueled this trend.
Both the government and local banks urge the need of a super-size bank for two major reasons. In January when a South Korean consortium won a $20 billion deal of constructing four nuclear reactors on the desert of the UAE, the officials encountered a problem that no local commercial bank is capable of financing this long-term project. The situation led to the revival of the idea of a mega bank and claim that the profits of international deals might be diluted if local firms have to rely on foreign banks for necessary initial capital. Some proponents of the super-size bank also base their argument on the development of local financial industry.
However, there are many obstacles blocking the advent of a mega bank. Many experts who oppose to making a mega bank by artificially merging several retail banks claim that the size has little relevance with the competence of the institution itself. “It has been proven by academic analysis that total asset of 10 trillion won is enough for banks to achieve economies of scale. But most of top commercial banks in Korea have already reached that level, which means theoretically there’s no benefit for them to enlarge their size,” Ji Dong-hyun, a researcher at the Korea Institute of Finance, told the Maekyung Economy.
Not just from academic circles but also the regulator and the heads of state-run institutes have shown skepticism toward the mega bank idea. “Samsung Electronics didn’t become competitive because it was big. Samsung became big because it was competitive.” Chin Dong-soo, the chairman of FSC, told his opinion at a meeting with reporters on April 28. The remark was amplified loudly after Kim Tae-joon, the head of KIF, stated that he does not see any synergy from Kookmin and Woori merge which had been considered most feasible plan in the market.
The global trend also might act as a decisive hurdle to the mega bank vision. Since the financial turmoil of 2008, there has been a wide movement in the United States and Western Europe to restrain banks’ movements to enlarge their size through M&A. The U.S. president Obama took initiative and he is strongly pushing for the adoption of regulations on the financial industry such as the “Volcker Rule”. The problem lying on this trend is that it might be implemented in global scale. The U.S. government is requesting the adoption of similar regulation on global financial market as it would weaken the competitiveness of U.S. financial firms if the Volcker Rule is introduced only in the domestic market. As this matter would be discussed at the G-20 Summit in this November and Korea is the coordinator of the meeting, experts speculate that it would be a bold decision if the state allows the creation of a super-size bank by selling Woori in complete form.
Due to those highlights and lowlights of the mega bank dream, it is a painful process for the government to decide how to sell the shares of Woori. But the FSC which takes leading role in the Woori privatization is determined to accelerate the process. Now it is considering every possible solution that might help to enhance the level of local financial industry. According to Chin, the outline of how it will be sold would be disclosed by June although the privatization may go beyond this year.
The FSC announcement in June would hold the spotlights from officers of financial industry at both home and abroad as it will include whether a mega bank dream might come true or not. “In terms of recovering public funds, a block sale form may be more efficient although it may be more complicated and take some time. If sold in complete form, it would not be easy to find a buyer with a deep pocket but we can expect some synergy effects from the merger,” said an analyst at Hanwha Securities.