Woori Financial's Inclusion of 'Insurance Company'... Decision May Be Delayed Until Q2 Next Year

Financial Supervisory Service Doubles Regular Inspection Team for Woori Financial, Scheduled for October
"Regular Inspection Results Expected Around Q2 Next Year"
Prolonged Acquisition of Dongyang and ABL Life Inevitable... Will Im Jong-ryong Make a Decision?

Woori Financial Group's incorporation of an insurance company, the final puzzle piece for its leap to a comprehensive financial group, is likely to be delayed until the second quarter of next year. Since Woori Financial cannot afford to wait indefinitely, there is speculation that the major shareholders and the board of directors may expedite the decision to replace the holding company chairman to advance the timeline. The financial authorities, who have moved up the regular inspection of Woori Financial to October, are making thorough preparations, including an unprecedented expansion of the inspection team to two divisions.

Financial Supervisory Service Doubles Woori Financial Regular Inspection Team... Evaluation Results to be Released in Q2 Next Year

According to a comprehensive report by Asia Economy on the 10th, the Financial Supervisory Service (FSS) is currently conducting preliminary work for Woori Financial's regular inspection scheduled for October, led by the Bank Inspection Division 2 along with personnel from Division 1. Previously, Division 1 was responsible for regular inspections of the four major financial holding companies, but this time Divisions 1 and 2 will work together. A senior FSS official said, "Due to scheduling conflicts caused by inspections such as the Hong Kong H-Share Index (HSCEI)-based equity-linked securities (ELS) and the regular inspection of KB Kookmin Bank, we decided to combine personnel from Divisions 1 and 2," adding, "While there have been personnel crossovers in the Financial Investment Inspection Division before, this is the first time for the banking side."

The prosecution, investigating allegations of improper loans involving relatives of former Woori Financial Group Chairman Sohn Tae-seung, is conducting a search and seizure at the Woori Bank headquarters and other offices.
[Photo by Yonhap News]

Since the FSS moved up Woori Financial's regular inspection, originally planned for next year, to October, it plans to complete the inspection by November to avoid extending into the year-end. The FSS will examine Woori Financial Holdings and its affiliates' internal control systems, capital adequacy, and risk management during the regular inspection.

Currently, prior to the regular inspection, the FSS has been conducting a second on-site investigation since the 22nd of last month into the improper loan case involving relatives of former Woori Financial Chairman Sohn Tae-seung. Based on this investigation, the FSS plans to comprehensively review during the regular inspection the improper loan case involving former Chairman Sohn, the delayed reporting controversy involving Chairman Lim Jong-ryong, and risks related to the acquisition of Dongyang and ABL Life Insurance. A senior FSS official stated, "Even if the regular inspection is completed by November, the evaluation results regarding these matters will not be available until the second quarter of next year."

Prolonged Acquisition of Dongyang and ABL Life Insurance... Woori Financial's Losses Inevitable

As the FSS accelerates the regular inspection, Woori Financial, which is pursuing the acquisition of Dongyang and ABL Life Insurance for 1.5494 trillion won, faces a dilemma. To finalize the acquisition of the two life insurance companies, Woori Financial must obtain approval for subsidiary incorporation from the Financial Services Commission (FSC). During the approval review, the FSC examines the feasibility of the business plan, soundness of financial and management status, and appropriateness of funding, with the most recent regular inspection's management evaluation serving as the standard. Woori Financial's latest inspection was in November 2021, when it received a grade 2. Approval for subsidiary incorporation is possible with a grade of 2 or higher. However, with recent risks related to Sohn Tae-seung and Lim Jong-ryong emerging, and on the 4th, FSS Chairman Lee Bok-hyun mentioning risks related to the life insurance acquisition, it is difficult for Woori Financial to apply for subsidiary incorporation approval based on the evaluation results from three years ago. A senior FSC official said yesterday afternoon, "Woori Financial has not yet applied for subsidiary incorporation approval."

Lee Bok-hyun, Governor of the Financial Supervisory Service, is speaking at the on-site meeting for household loan borrowers and experts held at KB Kookmin Bank in Yeouido, Seoul, on the 4th. Photo by Jo Yong-jun jun21@

According to information gathered from the industry and financial authorities, it is expected that Woori Financial's capital level alone would not make maintaining a grade 2 rating unreasonable. However, since the weight of internal control in the management evaluation has increased to 15% this year, if the scale of improper loans by former Chairman Sohn and deficiencies in the internal control system are larger than expected, there is a possibility of falling below grade 3. Recently, it has been additionally confirmed that loans related to former Chairman Sohn's relatives were executed not only at Woori Bank but also across affiliates such as Woori Financial Savings Bank, Woori Financial Capital, Woori Card, and Woori Comprehensive Financial (currently Woori Investment & Securities), which has further amplified the impact.

Ultimately, Woori Financial has no choice but to wait for the regular inspection results reflecting recent risks until the second quarter of next year. However, this could cause problems with the stock purchase agreement (SPA) for Dongyang and ABL Life Insurance signed with a multi-insurance group on the 28th of last month. Generally, SPAs include clauses requiring administrative procedures such as permits and approvals to be completed within a certain period to finalize the transaction. If the subsidiary incorporation process is delayed or fails, Woori Financial may be liable for penalties due to breach of contract. On Kyung-kwan, a researcher at Shinhan Investment Corp., said, "The noise related to the former chairman recently emerging during Woori Financial's insurance acquisition process is a hurdle to overcome," adding, "Woori Financial's reluctance to specify a concrete acquisition timeline is likely related to this context."

Will Woori Financial's Major Shareholders and Board of Directors Make a Decision?

Since Woori Financial's governance structure consists of major financial investment shareholders holding 3-4% stakes each, a failure to acquire Dongyang and ABL Life Insurance is expected to cause significant internal turmoil. There are even rumors that ABL Life Insurance might be resold.

However, it is not entirely without options. In the past, when risks related to owners or holding company chairmen surfaced during the process of incorporating financial companies as subsidiaries, there have been cases where the head was replaced, and the financial authorities proceeded with the review and approved the subsidiary incorporation. The acquisition of Hi Investment & Securities by DGB Financial in December 2017 is a representative example.

Chairman Lim Jong-ryong has also expressed his intention to take responsibility depending on the results of the financial authorities' investigation and the prosecution's inquiry related to this incident. It is reported that Chairman Lim is strongly determined to personally complete the insurance company acquisition, the crowning achievement of Woori Financial's transformation into a comprehensive financial group, and has conveyed to close aides that he is not attached to his position. If Woori Financial's board announces a renewal plan including the replacement of the holding company chairman and strengthening of internal controls, the subsidiary incorporation approval review could be expedited due to reduced related risks.

Lim Jong-ryong, Chairman of Woori Financial Group.