Seoul Bank:

1. Seoul Bank: The Case of a Nationalized Commercial Bank, Re-privatized After Restructuring Chungwon Kang Visiting Scholar—Banking International Monetary Fund And former CEO, Seoul Bank For World Bank conference on “Transforming Public Sector Banks,” April 9-10, 2003

2. Seoul Bank: Discussion Points • Restructuring is generally faster with a new management • Timing of sale seems tricky: • Bank restructuring is a process, not an event. (Gary Perlin, World Bank, 1996) • Sale is an event, of political significance. (A former board member, Seoul Bank, 2002) • Structure of Public Funds Governance focuses on downside minimization • Role of the Board is often underestimated

3. Background (I) At the onset of the crisis in December 1997, the IMF singled out Seoul Bank and KFB as sell quick banks. KFB sold to Newbridge in December 1999. Negotiations with HSBC for Seoul Bank broke down in August 1999. Two rounds of public funds injection by September 1999: Won 4.4 trillion.

4. Background (II) All known alternatives for Seoul Bank exhausted by early 2000. • In April 2000, Deutsche Bank engaged by the government as Financial and Restructuring Advisor for Seoul Bank • In June 2000, a new CEO appointed, selected through a process managed by an international HR firm. Mandate to “prepare the bank for privatization”

5. Situations of commercial banks with Public Funds injections (1998-2002):

6. Restructuring Process More or less complete overhauling of the bank’s operations Most International Best Practices in Banking implemented with the assistance of Deutsche Bank commercial bankadvisors

7. Restructuring (I) Management Formation (June – December 2000) • Seven with experience in foreign banks, IT, rating agencies • Sharing a common goal and International Best Practice (IBP) Organization • Functional organization with specialization • Separation of Front and Back Office [First time in Korea] Redundancy Program (September 2000) • 14 percent cut in agreement with the labor union • All employees born in and before 1948 left; over 50 percent cut from top two grades.

8. Restructuring (II) • Balance Sheet • Strict asset classification, sufficient provisioning, NPL sales, and write-offs • Portfolio rebalancing; Minimize market risk • Re-capitalization (December 2000) • Won 611 billion capital injection and Won 222 billion contribution to make up deficit in net worth for 10 percent BIS • MOU with quarterly targets for BIS, ROA, NPL ratios, cost ratio, and revenue per employee

9. Restructuring (III) • Operational Restructuring: (with about 20 Deutsche Bank commercial bank advisors: ) • Increased risk awareness and efficiency through Process Mapping • Systemization through Process Manuals; Consolidation of back office work • Re-building Business: • With specialized organization, focus on household mortgage loans • Performance based reshuffling of branch managers

10. Restructuring (IV) • IT • Separation of Software Development and Operations/Maintenance • IT Help Desk for internal customers [First time in Korea] •  Culture & Image Change • Commercial orientation: Customer first, business first • Head Office Departments as service providers to the branches • More work for more senior managers • New logo; New branch layout • Training • International Best Practices (IBPs) • New Branch System, specialized topics and customer service By late 2001, about 90% completed

11. Performance Summary

12. NPL Reduction

13. NPL Trend and Comparison (in billions of won) June 2000 . June 2001 . Sept. 2001 . Dec. 2001 . NPLs Ratio NPLs Ratio NPLs Ratio NPLs Ratio SeoulBank 2,285.3 19.8 1,027.6 8.6 435.7 3.6 320.0 2.4 Hanvit 7,288.4 14.0 3,686.2 7.7 2,950.1 6.0 981.4 2.1 Hana 1,713.7 5.6 1,154.3 3.9 988.0 3.2 650.0 2.5 Shinhan 1,316.3 4.0 924.1 2.7 1,279.5 3.6 868.6 2.4 KEB 3,455.7 10.3 1,535.9 4.7 1,662.7 4.7 1,186.0 3.6 Chohung 3,612.9 10.2 2,014.3 5.8 2,097.0 5.7 1,200.0 3.2 Hanmi 1,695.9 9.0 1,233.7 6.7 1,236.6 6.3 650.0 2.7 IBK 1,398.3 4.5 1,286.2 3.9 1,414.7 4.1 1,240.8 3.5 Kukmin 3,833.4 7.0 3,161.9 5.4 3,347.8 5.7 4,000.0 3.5 NPL Reduction, Comparison

14. Profit and Loss

15. Balance Sheet Change

16. Governance Structure Of Public Funds Banks: Commercial banks which have been re-capitalized by the government during the crisis to maintain solvency

17. Initial Concerns and Objectives • Accountability for losses; Moral hazards in bank management; and Government intervention in bank management • MOUs before re-capitalization; Existing management to leave; Government should not intervene in day to day management

18. Government Entities Involved in Public Funds Banks • Korea Deposit Insurance Corp., nominal shareholder and administrator of MOUs. • Financial Supervisory Service, regulator and administrator of rehabilitation plans prepared under prompt corrective action. • Financial Supervisory Commission, government agency charged with regulatory policy making but also doubling as the policy maker for troubled financial institutions. • Ministry of Finance & Economy, parent of KDIC and the ministry responsible for the financial industry • Public Funds Oversight Commission, overall responsibilities regarding the use and management of public funds, including sale of public funds banks • Korea Board of Audit (KBA), the public sector watch dog with power to audit matters related to public funds.

19. Role of the Board Management Oversight • Outside directors system and an audit committee system • A standing auditor, an inside director and a member of the audit committee

20. Seoul Bank’s Board • Five outside and two inside • Outside directors: Two university professors (one NGO member), two editorial writers, two corporate executives, one lawyer, one KDIC officer • In addition to management oversight, actively supported management in restructuring efforts and protection of the bank • No agency problem existed with this board

21. Thank You! Chungwon Kang Visiting Scholar—Banking International Monetary Fund And former CEO, Seoul Bank