The results of the regular inspection by the Financial Supervisory Service (FSS) of Woori Financial Group and Woori Bank revealed a total management failure, including unfair loans amounting to 230 billion won, which is expected to affect the ongoing merger and acquisition (M&A) of Tongyang and ABL Life. If Woori Financial Group receives a grade of 3 in the FSS management status evaluation, the acquisition of Tongyang and ABL Life is likely to be effectively canceled.
The discovery of procedural flaws in the decision-making process for the acquisition of Tongyang and ABL Life by Woori Financial Group is also expected to negatively impact the approval review process by financial authorities.
Lee Bok-hyun, head of the Financial Supervisory Service, announced the results of the regular inspection of Woori Financial Group and Woori Bank on the morning of the 4th at the FSS headquarters in Yeouido, Seoul. According to the FSS inspection results, a total of 230 billion won in unfair loans were executed at Woori Bank, including 73 billion won in loans to relatives of former Woori Financial Group Chairman Son Tae-seung over the past five years.
The FSS explained that issues were identified in the acquisition process of Tongyang and ABL Life by Woori Financial Group last year. According to Woori Financial Group's internal regulations, when pursuing an M&A, a preliminary review by the Risk Management Committee of the board of directors must first be held, and the review contents must then be reflected in the board's decision-making.
However, Yim Jong-ryong, chairman of Woori Financial Group, raised the issue of acquiring Tongyang and ABL Life to the board before the Risk Management Committee was convened. Furthermore, on the day the agreement was signed with the major shareholder of Tongyang and ABL Life, China Multinational Insurance, the Risk Management Committee and the board of directors were held just 20 minutes apart. It is suspected that Chairman Yim had already decided on the acquisition of Tongyang and ABL Life and merely convened the Risk Management Committee and board meeting in a formal manner.
The FSS also pointed out that a clause in the stock purchase agreement for Tongyang and ABL Life between Woori Financial Group and Multinational Insurance states that if financial authorities do not approve the acquisition, the deposit will not be refunded. If financial authorities do not approve the acquisition of Tongyang and ABL Life, Woori Financial Group will lose approximately 155 billion won in deposit. However, it has been confirmed that Woori Financial Group did not accurately inform the board of this.
The FSS pointing out the Common Equity Tier 1 (CET1) issue is also noteworthy. The FSS stated that Woori Financial Group and KB Financial Group did not measure and manage risks thoroughly, including hidden asset quality issues within the group, and indicated that if these were all reflected, the CET1 could drop by 10 to 20 basis points (basis point; 1bp=0.01%)
CET1 is a key indicator showing the crisis response capability of financial institutions. Financial authorities also reflect CET1 in management status evaluations. As of the end of September last year, Woori Financial Group's CET1 was 11.96%, falling below the financial authorities' recommended level of 12%, the only one among the top four financial groups. The strong dollar in the fourth quarter of last year is expected to have further lowered Woori Financial Group's CET1 compared to the previous quarter. Generally, when the won-dollar exchange rate rises by 10 won, a financial institution's CET1 is analyzed to drop by 0.01 to 0.03 percentage points. The won-dollar exchange rate rose by about 150 won only in the fourth quarter of last year. The problem is that if Woori Financial Group uses more than 1.5 trillion won for acquisition funds, the CET1 will inevitably decrease by that much. A low CET1 could negatively affect Woori Financial Group's acquisition of Tongyang and ABL Life.
The results of this inspection are expected to be reflected in the financial authorities' approval review for the acquisition of Tongyang and ABL Life. Woori Financial Group submitted an application for acquisition approval to the financial authorities on the 16th. Once the review begins, the financial authorities must decide whether to approve the acquisition within two months.
Park Chung-hyun, vice president in charge of banks at the FSS, stated in a pre-briefing the previous day that they plan to determine the evaluation grade of Woori Financial Group as quickly as possible based on the results of this inspection. Vice President Park noted, "I wonder if we should also conduct an M&A review of Woori Financial Group based on the regular inspection results from last year."
According to financial authorities' regulations regarding M&A approvals, the comprehensive evaluation grade for management status assessments of financial holding companies and subsidiaries must be at least grade 2. In this management status evaluation, internal control will be separated as a distinct evaluation section, and the evaluation weight has been significantly increased from the previous 5.3% to over 15%. Given the large-scale internal control failures identified, there is a high possibility that Woori Financial Group's evaluation grade, which was grade 2 during the last inspection, will be downgraded. Furthermore, the fact that Woori Financial Group violated internal regulations in the decision-making process for M&A and their CET1 being below the recommended level is also expected to act as obstacles in the approval review.
If the acquisition of the insurance company fails, Chairman Yim's plan to strengthen the non-bank portfolio will also be thwarted. Woori Financial Group has the highest reliance on banking among the top four financial groups and faces the task of acquiring non-bank affiliates as soon as possible.
However, even if the management status evaluation is grade 3, the financial authorities could approve the acquisition of Tongyang and ABL Life depending on their judgment. According to the regulations for supervising financial holding companies, even if the management status evaluation or standards are not met, if the financial authorities recognize that certain requirements can be fulfilled through capital increases or the liquidation of bad assets, the management status may be deemed sound. This means that even if the management status evaluation results in a grade of 3, if the financial authorities judge Woori Financial Group's soundness as 'capable of improvement,' the acquisition could be finally approved.
In the financial sector, there are forecasts that the financial authorities will not easily deny the big deal between Chinese and Korean corporations, which amounts to 1.5493 trillion won. Some also mention the possibility of a 'conditional approval' based on the strengthening of soundness and internal controls.