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Bank Resolution Korean Cases

Bank Resolution Korean Cases. Korea Deposit Insurance Corporation 2007. 3. 29. Taewan Chung twchung@kdic.or.kr. 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.

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Bank Resolution Korean Cases

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  1. Bank ResolutionKorean Cases Korea Deposit Insurance Corporation 2007. 3. 29 Taewan Chung twchung@kdic.or.kr International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  2. 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 Outline of Presentation International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  3. Overview of the Korean Economy KoreanEconomysince1997 Slowdown in Overall Economy Credit Crunch Paralysis of Function of Financial Intermediaries International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  4. Program 1st Stage Bank Restructuring Program (1998) Process Evaluation ☞Instructed 12 banks To prepare business Restructuring plan ☞ Focus : Improving Bank’s financial Structure to Attract Investors ☞ 5 Non-viable Banks: P & A Orders ☞Review : Evaluation Committee ☞Target : Banks below 8% BIS Ratio ☞ 7 Viable Banks : Conditional Approval International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  5. Program 2nd Stage Bank Restructuring Program (2000) Process Evaluation ☞Instructed 6 banks To prepare future business plans ☞ Focus : Enhancing The competitiveness Of financial industry ☞ 4 Non-viable Banks: Public Funds ☞Target : Banks below 8% BIS Ratio Or injected Public Funds at 1st stage ☞Review : Evaluation Committee ☞ 2 Viable Banks : Independent Survival International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  6. Structure of Public Funds Management Supervision & Planning of Public Fund Management including assets disposal PFOC Review of the appropriateness of disposal of assets held by the Government and its Agencies Sub-Committee K D I C Disposal and Recovery of assets acquired in Restructuring process International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  7. Korean Case Studies Case Study I - Cho Hung Bank (CHB) Case Study II – Woori Financial Group (WFG) International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  8. Privatization of CHB STEP 3 STEP 2 Dispatch of TL & IM (Oct.’02) STEP 1 Selection of FA ( Sep.’02) Decision of PFOC (Aug.’02) • RFP : 14 overseas, • 6 local IBs • “Morgan Stanley & Samsung Securities” Consortium chosen Contacted 88 investors • TL to 47 investors • IM to 15 investors  ‘Plans for disposal of bank shares held by KDIC’ •  Priority : Strategic Investors, • Partial sale in the OTC International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  9. Privatization of CHB STEP 6 STEP 5 Final Bid (Dec. ’02) STEP 4 Due Diligence (Nov. ’02) Preliminary Bid (Oct.’02)  2 Investors • SFG, Cerberus Consortium (Shinsei Bank, KFB) one month • Interrupted by Bank Labor Union • 8 Investors • Short List(4) : SFG, • Cerberus , ABN-Amro, • Shinsei Bank International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  10. Maximize the size of Public Funds to be recovered • Retain a 3rd Party to review Selling price & utilize the results for the negotiation Privatization of CHB STEP 7 STEP8 Review by Sub-Committee(Dec.’02) Selection by PFOC(Jan.’03) • Evaluation of Acquisition terms & conditions • The merger of CHB and its Buyer Synergy Effect  Enhancement of Int’l competitiveness of banking industry International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  11. Privatization of CHB STEP 11 Approval By PFOC (Jun. ’03) STEP 10 Negotiation With SFG (May ’03) STEP 9 Evaluation By the 3rd Party • KDIC, report to • PFOC (Jun.,’03) • Signed SPA on Jul. , 2003 6 weeks • Based on valuation of 3rd Party • 2 months by Shinhan • Accounting firm •  NAV : KRW 2,385 • Intrinsic Value: • KRW 5,929~ 6,967 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  12. Implications Landmark Transaction in terms of Sale Price Recovery higher than Injection 3.6+0.8 > 2.7 (Unit : KRW Tn) 56% premium on the trading price (KRW 3,980 p/s) 84% premium on the book value ( KRW 3,375 p/s) International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  13. Implications Improved Competitiveness of BankingIndustry Competition among local banks The Merger of CHB & Shinhan Bank  The 2nd largest bank (Total Assets : KRW163 tn) Entry of leading foreign banks International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  14. Korean Case Studies Case Study I - Cho Hung Bank (CHB) Case Study II – Woori Financial Group (WFG) International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  15. Privatization of WFG Establishment of WFG Stocks of the 5 banks Stocks of the 5 banks 2 3 5 insolvent banks WFG’s stocks 4 Capital Injection 1 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  16. Block Sale (Sep, ’04) • 45 million shares • Recovered $ 324 million • Sold 5.7% stake • Discount rate : 3% Privatization of WFG Initial Public Offering (June.’02) • 90 million shares (including 36 million • new shares)  Recovered $ 367 million •  Sold 11.8% stake  KSE Listing International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  17. Privatization of WFG 2. MOU management 1. Establishment of WFG MOU Targets About MOU • Financial targets (6 sectors) • : CAR, ROA, Cost-income ratio, • NPL ratio etc. • Non-financial targets • IT integration • Standardize work process • 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 * They set up with consideration of domestic leading banks’ performance International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  18. Privatization of WFG Up to now In the future 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 • Sale of controlling stake • Gradual monetization of minority stake through market trade (i.e. block sale) • After 2 sales, KDIC’s ownership changed from 100% to 78% International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  19. Implications • Selection of effective turnaround process • 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 • Platform for Surplus in Public Funds Recovery * 628,458,609 shares × 23,400won(’07.3.20) International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

  20. Q & A Thank you ! International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007

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