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International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Bank Resolution Korean Cases Korea Deposit Insurance.

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Presentation on theme: "International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Bank Resolution Korean Cases Korea Deposit Insurance."— Presentation transcript:

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

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

3 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Overview of the Korean Economy Korean Economy since 1997 Paralysis of Function of Financial Intermediaries Credit Crunch Slowdown in Overall Economy

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

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

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

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

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

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

10 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Privatization of CHB Maximize the size of Public Maximize the size of Public Funds to be recovered Retain a 3 rd Party to review Retain a 3 rd Party to review Selling price & utilize the Selling price & utilize the results for the negotiation results for the negotiation Review by Sub-Committee(Dec.02) Selection by PFOC(Jan.03) Evaluation of Acquisition Evaluation of Acquisition terms & conditions terms & conditions The merger of CHB The merger of CHB and its Buyer and its Buyer Synergy Effect Synergy Effect Enhancement of Intl Enhancement of Intl competitiveness of competitiveness of banking industry banking industry STEP 7 STEP 8

11 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Privatization of CHB Evaluation By the 3 rd Party Evaluation Negotiation With SFG (May 03) Negotiation With SFG (May 03) Approval By PFOC (Jun. 03) Approval By PFOC (Jun. 03) 2 months by Shinhan 2 months by Shinhan 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 weeks 6 weeks Based on valuation of Based on valuation of 3 rd Party KDIC, report to KDIC, report to PFOC (Jun.,03) PFOC (Jun.,03) Signed SPA on Signed SPA on Jul., 2003 STEP 9 STEP 10 STEP 11

12 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Implications Landmark Transaction in terms of Sale Price Recovery higher than Injection 3.6+0.8 > 2.7 (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)

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

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

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

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

17 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 About MOU Object : rapid business normalization Structure : financial targets* non-financial targets Inspection : every quarter Failure of MOU targets sanctions No interference of WFGs 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 Privatization of WFG 1. Establishment of WFG 2. MOU management

18 International Conference on Enhancing the Effectiveness of Deposit Insurance Operation, Hanoi March, 2007 Privatization of WFG In 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 now After 2 sales, KDICs 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 WFGs voting shares

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

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


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