Jeil 2 and Ace Mutual are two of seven troubled savings banks that the Financial Services Commission suspended in September after a pile-up of soured property loans deteriorated the banks’ financial health. A total of 16 savings banks have been suspended this year.

If Hana Financial successfully acquires these two banks, it will join the list of other major banking groups that have moved to acquire suspended savings banks. Top player Woori Financial Holdings Co. took over Woori FG Savings Bank earlier this year, while KB Financial Group Inc. and Shinhan Financial Group Co. were selected as preferred bidders for Jeil Savings Bank and Tomato Savings Bank, respectively.

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In the years following the 1997 Asian Financial Crisis, Korean regulatory authorities undertook reforms to the financial and banking industries. One of the main areas of reform was Korea’s accounting practices.

The globalization of capital markets has led to a growing need for accounting consistency worldwide. However, due to the differences between Korean accounting standards (K-GAAP) and IFRS, international confidence in Korea’s corporate accounting was low. This lack of confidence led to the Korean capital market suffering from what some term the “Korea Discount”, as global investors saw the Korean accounting system as lacking transparency.

Initially it was decided that changes making K-GAAP more similar to IFRS would be implemented incrementally. By 2007 K-GAAP was almost the same as IFRS except for a few areas. However many felt that continued phased-in convergence was not sufficient to convince markets that Korea was compliant with IFRS. In order to ameliorate the problems caused by Korea’s differing financial reporting standards, the Financial Supervisory Commission (currently the Financial Services Commission) announced that it would move to adopt IFRS.

The Financial Services Commission announced the road map for the adoption of IFRS on March 15, 2007. Under the roadmap, all companies (with the exception of financial services companies) were permitted to begin IFRS reporting beginning in 2009. However, once a company begins reporting under IFRS, they are prohibited from reverting. For all listed companies, financial reporting under IFRS was required from 2011.

Consolidated quarterly and semiannual financial reporting was required beginning in 2011 for companies with 2 trillion won in assets or more. Starting in 2013, companies with less than 2 trillion won in assets must begin making consolidated financial reports. Prior to IFRS adoption, companies that held 30% equity or more in another company were required to issue consolidated financial reports. Under IFRS, it has been raised to 50% ownership.

Currently, only listed companies and those unlisted companies that have voluntarily made the switch are required to report under IFRS. In 2009, the Korean Accounting Standards Board (KASB) developed a financial reporting standard for non-public entities that is based on the existing K-GAAP with some modifications. KASB has plans to converge its standards for non-public entities with a version of IFRS designed for small and medium sized businesses over the coming years.

For the time being, unlisted companies (with the exception of financial institutions and state-owned companies) have the choice between full IFRSs and the Korean Accounting Standards for Non-Public Entities. According to a May 2011 investigation by Korea’s Financial Supervisory Service looking at 8812 out of 13,396 unlisted companies which submitted financial statements in December, 842 or 9.6% had adopted IFRS.

The timeline for the convergence of the current K-GAAP based reporting standards with IFRS for SMEs has yet to be set. However, great strides have already been made in addressing the issues of transparency, comparability and reliability caused by Korea’s accounting standards. Hopefully, continued improvements to the IFRS used by Korean listed companies and a speedy, widespread adoption of IFRS for SMEs will help to further distance us from the era of the “Korea Discount”.

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In the aftermath of the 1997-98 Asian financial crisis, the KDIC injected 2.7 trillion won into the now-defunct Choheung Bank. In 2003, KDIC sold its 80 percent stake in Choheung to Shinhan Financial and received 49 percent of the payment in the latter’s shares. Since then, the KDIC has made 4.7 trillion won from reducing its stake in Shinhan Financial via block sales.

The Financial Services Commission (FSC) has reported that as of the end of May this year, the South Korean government has recovered 60.2 percent of the public funds that were injected into local financial institutions when the financial crisis began in 2007.

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JoongAng Daily reported that, at a National Assembly committee hearing on June 14, FSC Chairman Kim Seok-dong said the government barred KDB from making a bid due to “the current lack of public consensus” about KDB’s participation.

This new development in the ongoing Woori saga will increase the likelihood that the FSC will get approval for their legislative amendment for easing bank ownership. Now that a KDB-Woori merger is out of the picture, the regulators are free from the fierce public opposition that surrounded the sale.

The FSC chairman also emphasized that the privatization of Woori Finance is not only about recovering public funds, but also about the creation of a large banking institution that would help develop the domestic industry. He added that the Woori sale is still open to all local and foreign bidders other than KDB.

Unfortunately, no other bidder has shown interest in the sale. KB Financial Group was once considering the purchase, but has withdrawn from the running, explaining that a merger between the two companies would be undesirable.

The KDIC will be accepting LOIs until June 29.

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According to financial authorities, the number of PEFs rose to 148 in the country with 26.6 tn won ($24.63 bn) in aggregate investments. Their actual investments expanded from 4.7 tn won when the first 15 PEF firms started operation, to today’s 16.7 tn won.

Korean PEFs started shifting their focus away from local manufacturing companies in 2010, and began channeling their investments into diverse overseas businesses located in advanced nations such as the US, and in emerging economies like China.

An official from the Financial Service Commission (FSC) stated that “PEFs are making various kinds of investments, not only investments into companies that are conducting buy-outs, but also restructuring.” The official added that Korean PEFs are expected to “play greater roles in clearing real estate project financing (PF) loans” in the near future.

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FSC: “Public Hostility Not to Affect KEB Sale”

“Public opinion is not an issue in the consideration of this process,”asserted Kwon Hyouk-se, Vice Chairman of South Korea’s Financial Services Commission(FSC) concerning the possible sale of Korea Exchange Bank (KEB) by U.S. Lone Star.

During an interview with the Financial Times(FT) on Monday, a question was raised Kwon whether the hostile public sentiment against the foreigner’s takeover has been interfering with the selling of KEB.

With regards to the participation of FSC in the selling process, the Vice Chairman stated, “Neither Lone Star nor any other potential purchaser has contacted FSC, and the only role the Commission is to assume is to review the suitability of any buyer after the deal is concluded.”

He added that domestic banks will not (be) preferred over foreign banks, or the foreign discriminated against the domestic during the sales process, for South Korea provides an arena for fair competition.

Meanwhile, Australia and New Zealand Banking Group, British Standard Chartered and HSBC have also shown interest in the takeover of KEB.

For more information on Lone Star’s sale of KEB see all the previous posts here.

(Source: Maeil Business Newspaper)

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The report, which cited information from the state-run Financial Services Commission, stated that the Public Fund Oversight Committee decided yesterday to sell a 21.43% stake in the listed South Korean lender.

The government holds the stake through Korea Deposit Insurance, which would evaluate the stake sale through stock market trading as an option until a financial advisor is mandated.

(Source: Yonhap News)

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The government reaffirmed their deregulation stance, at a forum in Seoul where government officials, private economists and CEOs discussed future strategies for the nation’s financial industry, according to this Korean article in the Korea Economic Daily.     

According to the report, doubts had been cast over consolidation and restructuring of the banking sector in South Korea, after recent changes in countries like the US, had led to apprehensions over the restructuring of local banks, like Woori Finance, which is about to be privatised (see Update: Woori Finance’s Privatization).   

Another report in the paper cited an unnamed insider at the Financial Services Commission as saying that given the size of the South Korean economy, there were still too many small banks, whose efficiency could be boosted by M&A.    

The Korea Economic Daily also provided two interesting graphs (translated below), that back up the belief that Korea’s financial sector is underveloped, and could gain dramatically from consolidation.    

(Source: Korea Economic Daily)

(Source: Korea Economic Daily)

 Also covering the event was the Korea Herald article – ‘Seoul to continue financial deregulation‘.

“If we indiscriminately tighten all regulations including a market entry ban or a sales restriction just as advanced nations do, it could hurt the growth of the local financial industry,” said Kwak Seung-jun, chairman of the Presidential Council for Future and Vision.  

Liking the status of the Korean financial industry’s autonomy to being at an “elementary school level,” Kwak said a financial deregulation would help the industry leap into “a junior-high school level.”  

While the government eases regulations, the regulator should make sure to enhance supervision, he added. Kwak’s view was shared by Chin Dong-soo, chairman of the Financial Services Commission.  

Chin said U.S. President Barack Obama’s recent proposed plan to curb the banking sector’s risky activities would be ill-suited if applied to Korea, given the small size of the market.

“It is not appropriate to apply global trends directly to the Korean case because the Korean financial sector has different characteristics from those in advanced countries,” Chin said.  

“Korea should sweepingly improve the structural weakness which was exposed by the latest financial crisis, while encouraging a continued growth of finance,” he said.      

Finance Minister Yoon Jeung-hyun said the government will raise its ability to counter a systemic risk and prevent a recurrence of a financial crisis by tackling debt problems and stabilizing the foreign exchange market.

 ”We need to enhance our crisis management ability by closely monitoring the macroeconomic supervision system and the early alert system,” Yoon said.    

“To make sure that debt problems do not hurt economic recovery, we will push corporate restructuring and help the financial sector clean up bad debts as soon as possible,” he said.      

In a discussion of how to redesign the global financial system to strengthen the industry’s competitiveness, Deputy Finance Minister Shin Je-yoon said the current global financial system faces “a flood of regulations,” saying many countries are announcing too many initiatives to strengthen regulations. Korea will carefully review which to adopt and which not to, he said.     

For previous stories on Korea’s financial deregulation and/or consolidation see here.    

(Sources: Korea Economic Daily, Korea Herald)

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Jin Dong-su, FSC

Woori Finance could be merged with another financial services firm before the government divests its stake in it, Maeil Business reported here (Korean).

The report cited Jin Dong-su, the head of South Korea’s Financial Services Commission, who said such a move would make it easier to sell the Woori Finance stake, and help increase the value of the firm.

It was earlier reported that the South Korean government, which holds a 66% stake in Woori Finance through Korea Deposit Insurance Corp., was assessing selling the stake.

For more information see previous posts – ‘In the news: Woori, Hynix, and Daewoo two‘ and ‘New Year Sales‘.

(Source: Maeil Business Newspaper)

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