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Woori Bank’s M&A capability in question despite new holding company structure

While South Korean commercial bank Woori Bank and its subsidiaries are inching closer to a holding company structure, possibilities of aggressive mergers and acquisitions to expand the banking group remain low for the time being.

Such skepticism comes amid a possible fall in the capital adequacy ratio of the nation’s fourth-largest commercial lender, despite the banking group’s higher capacity to leverage private investment after the holding company is reintroduced in 2019.

Under Korean law, a bank is allowed to buy shares of financial firms and become their parent company. But the volume of its investments -- including those in existing subsidiaries like Woori Card -- cannot exceed 20 percent of the bank’s equity capital. Woori Bank’s equity capital came to 20.8 trillion won ($18.4 billion) as of end-June, according to its consolidated financial statement.

In contrast, a financial holding company is able to invest at most 130 percent of its capital to buy shares of subsidiaries, including a flagship commercial bank.

What stands in the way of the banking group expansion is a tougher standard to assess its credit risk. In the first year of operation a standardized approach, as suggested in the Basel II accord, will be applied to assess Woori banking group’s capital adequacy ratio by the Bank for International Settlements.

The standardized approach is regarded as a tougher set of risk parameters compared to an internal ratings-based approach, as the former’s risk weight for claims are heavier than the latter. For example, claims secured by residential property are imposed risk weight of 35 percent under the standardized approach, whereas the risk weight will lower to 10-15 percent under the IRB approach.

While Woori Bank’s BIS capital adequacy ratio stood at 15.8 percent, the ratio will drop to 11.7 percent upon introduction of financial holding company structure, according to an estimate by Daishin Securities analyst Choi Chung-uk. A BIS ratio at 8 percent is considered the minimum barometer for financial health of an institution.

Woori‘s takeover of major nonbanking financial institutions “appears hard to achieve” with holding company structure, given its need to “manage risk-weighted assets,” Choi said.

By Korean rules, a banking institution is granted permission to use the IRB approach instead of a standardized approach to measure risks a year after it adopts the standardized approach. The adequacy ratio will automatically rise the next year under the new criteria for risk assessment.

The Financial Supervisory Service, a financial watchdog, decided in August to force Woori to evaluate the groupwide credit risk under a standardized approach in 2019.

Woori Bank announced Thursday it would name Sohn Tae-seung to double as the chief executive of Woori Bank and chairman of the new holding company, a day after it gained regulatory approval from the Financial Services Commission. Sohn will take the post following an extraordinary shareholders meeting in December. His term will end in March 2020, according to the bank. Sohn’s task as a chairman will include preparing to adopt IRB approach to measure the group’s credit risk.

By Son Ji-hyoung (