Seoul Bank:

The Case of a Nationalized Commercial Bank, Re-privatized

After RestructuringChungwon Kang

Visiting Scholar—Banking

International Monetary Fund

And former CEO, Seoul Bank

For World Bank conference on “Transforming Public Sector Banks,” April 9-10, 2003

Seoul Bank: Discussion Points

Restructuring is generally faster with a new management

Timing of sale seems tricky: Bank restructuring is a process, not an event. (Gary

Perlin, World Bank, 1996) Sale is an event, of political significance. (A

former board member, Seoul Bank, 2002) Structure of Public Funds Governance focuses on

downside minimization Role of the Board is often underestimated

Background (I)

At the onset of the crisis in December 1997, the IMF singled out Seoul Bank and KFB as sell quick banks.

KFB sold to Newbridge in December 1999.

Negotiations with HSBC for Seoul Bank broke down in August 1999.

Two rounds of public funds injection by September 1999: Won 4.4 trillion.

Background (II)

All known alternatives for Seoul Bank exhausted by early 2000.

In April 2000, Deutsche Bank engaged by the government as Financial and Restructuring Advisor for Seoul Bank

In June 2000, a new CEO appointed, selected through a process managed by an international HR firm. Mandate to “prepare the bank for privatization”

Situations of commercial banks with Public Funds injections (1998-2002):

Chohung Existing management continued

Hanvit Merger between Hanil Bank and Commercial Bank of Korea in 1999. Became a main bank in Woori Financial Holding Co. in 2000. New CEO in March 2001, management team mostly legacy Hanil Bank and Commercial Bank of Korea

KEB Commerze Bank became a major foreign investor without management control in 1998. New CEO appointed in March 2001 but management team is predominantly legacy.

KFB 51 per cent share sold to Newbridge with management control and put-back option. Foreign CEO and predominantly foreign management team

Seoul Bank 100 per cent government owned. New CEO and predominantly new management team

Restructuring Process

More or less complete overhauling of the bank’s operations

Most International Best Practices in Banking implemented with the assistance of Deutsche Bank

commercial bankadvisors

Restructuring (I)

Management Formation (June – December 2000) Seven with experience in foreign banks, IT, rating agencies Sharing a common goal and International Best Practice (IBP)

Organization Functional organization with specialization Separation of Front and Back Office [First time in Korea]

Redundancy Program (September 2000) 14 percent cut in agreement with the labor union All employees born in and before 1948 left; over 50 percent cut

from top two grades.

Restructuring (II)

Balance Sheet Strict asset classification, sufficient provisioning, NPL

sales, and write-offs Portfolio rebalancing; Minimize market risk

 Re-capitalization (December 2000) Won 611 billion capital injection and Won 222 billion

contribution to make up deficit in net worth for 10 percent BIS

MOU with quarterly targets for BIS, ROA, NPL ratios, cost ratio, and revenue per employee

Restructuring (III)

Operational Restructuring: (with about 20 Deutsche Bank commercial bank advisors: ) Increased risk awareness and efficiency through Process

Mapping Systemization through Process Manuals; Consolidation

of back office work  Re-building Business:

With specialized organization, focus on household mortgage loans

Performance based reshuffling of branch managers

Restructuring (IV) IT

Separation of Software Development and Operations/Maintenance IT Help Desk for internal customers [First time in Korea]

 Culture & Image Change Commercial orientation: Customer first, business first Head Office Departments as service providers to the branches More work for more senior managers New logo; New branch layout

Training International Best Practices (IBPs) New Branch System, specialized topics and customer service

By late 2001, about 90% completed

Performance Summary

Trends of Operating Income Before Provisions & NPL Ratio

* Excludes loss on guaranteed managed trust in 1999 (Average of 4 Quarters) * NPL : Substandard and below

21

(KrW in Billions)84.4

10

100

500

1999* 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

2000 2001 2002

33.648.7

26.6

2.8

13.1

64.163.2

79.9 76.2 78.3

20.0419.75

8.63 2.442.17

19.37

12.083.60

84.4

1.97

2Q 3Q

75.6

2.05

* NPL ratio (%)

Operating income before provisions (KrW in billions)

NPL Reduction

Liquidation of Nonperforming Assets

The Bank has liquidated nonperforming assets worthKrW 3,332.3 billion since June 2000.

The Bank has liquidated The Bank has liquidated nonperformingnonperforming assets worthassets worthKrWKrW 3,332.3 billion since June 2000. 3,332.3 billion since June 2000.

13

Hana 1.5 Shinhan 1.6

Koram 1.4 Woori 2.5

CHB 2.5 KEB 2.5

Kookmin 3.0

Hana 1.5 Shinhan 1.6

Koram 1.4 Woori 2.5

CHB 2.5 KEB 2.5

Kookmin 3.0

Details of liquidation(KrW in Billions)

Details of liquidation(KrW in Billions)

Total : 3,332.3Total : 3,332.3

NPL Sales to KAMCO : 868.3NPL Sales to Foreign Buyers : 404.0

Write-off : 868.2

ABS Issuance : 446.8

Collateral Sales and Others : 745.0

NPL Sales to KAMCO : 868.3NPL Sales to Foreign Buyers : 404.0

Write-off : 868.2

ABS Issuance : 446.8

Collateral Sales and Others : 745.0

‘00.6 ‘00.12 ‘01.6

20.04 19.75

8.63

13.71

7.84

3.27

(Unit : %)

NPL ratio (substandard & below loans)Net NPL ratio (S&B loans - provisions)

‘01.12

2.44

0.75

‘02.6

1.97

0.66

NPL ratios of other banks (’02.9)

NPL ratios of other banks (’02.9)

Koram 0.70 Hana 0.85

Shinhan 0.92 Woori 0.94

KEB 1.28 CHB 1.29

Kookmin 1.83

Koram 0.70 Hana 0.85

Shinhan 0.92 Woori 0.94

KEB 1.28 CHB 1.29

Kookmin 1.83

Net NPL ratios of other banks (’02. 6)

Net NPL ratios of other banks (’02. 6)

‘02.3

2.17

0.68

‘02.9

2.05

0.78

NPL Reduction, Comparison

NPL Trend and Comparison(in billions of won)

 

  June 2000 . June 2001 . Sept. 2001 . Dec. 2001 .

  NPLs Ratio NPLs Ratio NPLs Ratio NPLs Ratio

                 

SeoulBank 2,285.3 19.8 1,027.6 8.6 435.7 3.6 320.0 2.4

Hanvit 7,288.4 14.0 3,686.2 7.7 2,950.1 6.0 981.4 2.1

Hana 1,713.7 5.6 1,154.3 3.9 988.0 3.2 650.0 2.5

Shinhan 1,316.3 4.0 924.1 2.7 1,279.5 3.6 868.6 2.4

KEB 3,455.7 10.3 1,535.9 4.7 1,662.7 4.7 1,186.0 3.6

Chohung 3,612.9 10.2 2,014.3 5.8 2,097.0 5.7 1,200.0 3.2

Hanmi 1,695.9 9.0 1,233.7 6.7 1,236.6 6.3 650.0 2.7

IBK 1,398.3 4.5 1,286.2 3.9 1,414.7 4.1 1,240.8 3.5

Kukmin 3,833.4 7.0 3,161.9 5.4 3,347.8 5.7 4,000.0 3.5

                 

Profit and Loss

Profit & Loss

20

2000. 122000. 12

Net Interest IncomeNet Interest Income

Non-interest IncomeNon-interest Income

Operating expensesOperating expenses

Operating income before provisionOperating income before provision

Provision (New / Refund)Provision (New / Refund)

Non-operating income (incl.tax) Non-operating income (incl.tax)

Operating incomeOperating income

2001. 122001. 12

Net incomeNet income

91.291.2

387.1387.1

69.469.4 301.9301.9

337.2337.2

283.4283.4

△ 942.1△ 942.1

△ 365.3△ 365.3 △ 355.7△ 355.7

△ 850.9△ 850.9

△ 277.3△ 277.3

△ 519.8△ 519.8

54.654.6331.1331.1

6.16.1

101.4*101.4*

(KrW in Billions) 1999. 121999. 12

△ 2,343.9△ 2,343.9

110.8110.8

440.2440.2

△ 363.9△ 363.9

△ 250.4△ 250.4

284.9284.9

△ 329.4△ 329.4

△ 2,233.1△ 2,233.1

2002. 62002. 6

145.7145.7

198.7198.7

162.7162.7

△ 181.7△ 181.7

△ 59.0△ 59.0

4.64.6

103.7103.7

108.3108.3

2002. 32002. 3

74.974.9

98.698.6

78.378.3

△ 95.2△ 95.2

△ 21.2△ 21.2

△ 0.6△ 0.6

57.257.2

56.656.6

2002.12(P)2002.12(P)

314.0314.0

406.0406.0

330.0330.0

△ 390.0△ 390.0

△ 130.0△ 130.0

28.028.0

200.0200.0

228.0228.0

*Including deferred tax income of KrW40.7 billion

2002. 92002. 9

209.5209.5

306.0306.0

238.3238.3

△ 277.2△ 277.2

△ 95.8△ 95.8

△ 6.1△ 6.1

142.5142.5

136.4136.4

Balance Sheet Change

Balance Sheet

22

2001. 122001. 121999. 121999. 12 2000. 122000. 12

Total AssetsTotal Assets 26,797.326,797.3

Bank AccountBank Account 22,128.422,128.4

Trust AccountTrust Account

6,247.96,247.9

Total LoansTotal Loans 12,680.312,680.3

20,437.420,437.4

19,139.519,139.5

1,297.91,297.9

11,570.411,570.4

23,373.823,373.8

1,642.51,642.5

13,348.013,348.0

21,731.321,731.3

Household LoansHousehold Loans

Corporate LoansCorporate Loans

4,668.94,668.9

2,258.02,258.0

459.3459.3

9,207.19,207.1 8,660.28,660.2 6,822.76,822.7

Mortgage LoansMortgage Loans

2,183.22,183.2

716.9716.9 2,890.52,890.5

(KrW in Billions)

1,290.01,290.0Other LoansOther Loans 652.2652.2 277.4277.4

2002. 12(P)2002. 12(P)

9,360.19,360.1

28,014.828,014.8

2,533.32,533.3

17,268.617,268.6

25,481.525,481.5

7,756.07,756.0

5,260.05,260.0

152.5152.5

Total Shareholders’ EquityTotal Shareholders’ Equity 1,043.61,043.6 550.8550.8 685.6685.6 1,000.01,000.0

2002. 32002. 3

7,808.97,808.9

25,868.125,868.1

1, 625.61, 625.6

15,155.415,155.4

24,242.524,242.5

7,033.27,033.2

3,761.03,761.0

313.3313.3

958.1 *958.1 *

2002. 62002. 6

8,473.78,473.7

25,881.625,881.6

1,693.51,693.5

16,021.816,021.8

24,188.124,188.1

7,266.97,266.9

4,471.84,471.8

281.2281.2

918.2 *918.2 *

* Valuation gains on FRN-typed KDIC Balance – KrW 158.3 (March 2002), KrW 130.6 (June 2002), KrW 92.7 (September 2002)* Valuation gains on FRN-typed KDIC Balance – KrW 158.3 (March 2002), KrW 130.6 (June 2002), KrW 92.7 (September 2002)

2002. 92002. 9

9,210.59,210.5

26,724.226,724.2

1,546.11,546.1

16,810.516,810.5

25,178.125,178.1

7,357.37,357.3

5,329.45,329.4

242.7242.7

903.0 *903.0 *

Governance Structure

Of Public Funds Banks:

Commercial banks which have been re-capitalized by the government during

the crisis to maintain solvency

Initial Concerns and Objectives

Accountability for losses; Moral hazards in bank management; and Government intervention in bank management

MOUs before re-capitalization; Existing management to leave; Government should not intervene in day to day management

Government Entities Involved in Public Funds Banks

Korea Deposit Insurance Corp., nominal shareholder and administrator of MOUs.

Financial Supervisory Service, regulator and administrator of rehabilitation plans prepared under prompt corrective action.

Financial Supervisory Commission, government agency charged with regulatory policy making but also doubling as the policy maker for troubled financial institutions.

Ministry of Finance & Economy, parent of KDIC and the ministry responsible for the financial industry

Public Funds Oversight Commission, overall responsibilities regarding the use and management of public funds, including sale of public funds banks

Korea Board of Audit (KBA), the public sector watch dog with power to audit matters related to public funds.

Role of the Board

Management Oversight Outside directors system and an audit

committee system A standing auditor, an inside director and a

member of the audit committee

Seoul Bank’s Board

Five outside and two inside Outside directors: Two university professors (one

NGO member), two editorial writers, two corporate executives, one lawyer, one KDIC officer

In addition to management oversight, actively supported management in restructuring efforts and protection of the bank

No agency problem existed with this board

Thank You!

Chungwon Kang

Visiting Scholar—Banking

International Monetary Fund

And former CEO, Seoul Bank