Woori Finance Agrees to Take Over Samhwa Mutual’s Assets

Woori Finance Holdings Co., South Korea’s third-largest financial company by market value, agreed to take over the assets of Samhwa Mutual Savings Bank as the company seeks to diversify its customer base.

Seoul-based Woori will spend about 100 billion won ($90 million) as equity capital to create a savings bank unit and acquire some Samhwa Mutual assets from state-run Korea Deposit Insurance Corp., Woori’s managing director Jung Ki Hwa said by telephone today in Seoul.

The deal would help Woori expand into the market for lower-credit customers as commercial lending growth in South Korea slows, according to Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd. The Financial Services Commission suspended Samhwa Mutual for six months in January after the lender’s debt soared and caused a capital shortage, making it the first of eight savings banks halted this year.

“It could be positive for Woori and other big lenders to get a new business arm that has access to lower credit-profile customers,” said Heo, who helps manage the equivalent of $1.8 billion. “I don’t think the cost or the potential risk from taking over bad assets at a savings bank will hurt Woori’s business fundamentals, given the small size.”

Woori shares rose 3.5 percent to 14,650 won at the 3 p.m. close in Seoul trading, more than the key Kospi index’s 0.3 percent advance.

Debt Exceeds Assets

Debt at Samhwa surpassed its assets and its capital-adequacy ratio slipped to minus 1.42 percent at the end of June, below the Financial Services Commission’s requirement of 5 percent, the regulator said in a statement on Jan. 14. Korea Deposit chose Woori as a preferred bidder on Feb. 18, ahead of Shinhan Financial Group Co. and Hana Financial Group Inc.

Samhwa had 1.4 trillion won in assets as of June 30, the regulator said in January. Woori and Korea Deposit will discuss further how much of Samhwa’s assets will be transferred to Woori, according to Jung. The savings bank may resume business as early as this month, he said.

Credit ratings on Woori Finance and its Woori Bank unit would be “unaffected” by the potential acquisition of Samhwa Mutual, given the relatively small asset size of the savings bank, Standard & Poor’s analyst YuMee Oh wrote in a report on Feb. 18.

The financial regulator imposed a six-month business ban on seven more savings banks last month, after the first suspension at Samhwa Mutual triggered a bank run among lenders whose financials were already weak after loans to builders and developers failed amid a real-estate slump.

‘Reputation Risk’

The FSC today announced measures to tighten supervision of savings banks. The plans include increasing restrictions on lending by relatively better-capitalized savings banks and imposing limits on high-risk assets and excessive expansion.

The regulator also said it will also increase the deposit insurance rate to 0.4 percent from 0.35 percent and create a restructuring account. Last month it pledged to support savings banks to avoid an industry crisis.

“The big lenders couldn’t really enter into the savings bank business before for fear of reputation risk, when in reality it’s an attractive market that creates higher profit and no overlap with their current customers,” said Hwang Seok Kyu, a banking analyst at Kyobo Securities Co. “The ongoing crisis would help justify national lenders’ entry into savings banks.”

Combined assets at South Korea’s 105 savings banks totaled 87 trillion won at the end of 2010, accounting for 4.7 percent of total assets in the country’s commercial banking industry, according to FSC data.

The savings banks had a combined net loss of 533.3 billion won last year and a non-performing loan ratio of 10.6 percent, according to the regulator.

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