Financial Services Commission to Revisit Woori Financial M&A... Internal Control Improvements Are Key

FSC Subcommittee Holds Meeting
Second Discussion on Woori Financial Group's M&A Concludes
Decision Made to Resume Deliberations

The Financial Services Commission (FSC) held a second discussion regarding Woori Financial Group's acquisition and merger (M&A) of Dongyang and ABL Life Insurance but failed to reach a conclusion. A third subcommittee meeting is planned soon to continue the discussions. Previously, Woori Financial Group received a grade 3 in the Financial Supervisory Service's (FSS) management evaluation. According to the principles, acquiring an insurance company would be impossible, but a 'conditional approval' can be decided on the premise of improvements in internal controls and capital ratios. The establishment of an effective internal control system is expected to determine whether conditional approval is granted.

According to financial authorities on the 11th, the FSC held a committee meeting yesterday afternoon to discuss whether to approve Woori Financial Group's incorporation of the insurance company as a subsidiary. This was the second discussion since the agenda was submitted on March 27.

The FSC was unable to reach a conclusion in the second subcommittee meeting as well. It is reported that opinions were raised that further verification regarding improvement measures is necessary. Accordingly, a third subcommittee meeting will be held to discuss Woori Financial Group's M&A again.

Inside and outside the financial authorities point out that "effective internal control" is the key to conditional approval. This is because the internal control score was relatively low in the FSS management evaluation. The FSS management evaluation is broadly divided into three evaluation areas: ▲risk management ▲financial status ▲potential shocks, scoring 50 items.

An industry insider said, "Although the financial status received a grade 2, risk management received a grade 3," adding, "The overall grade is 3, but the internal score was just 0.1 to 0.2 points short of grade 2 (70 points)."

Meanwhile, Woori Financial Group, led by Chairman Lim Jong-ryong, is putting all efforts into improving the internal control system. This is because conditional approval focuses on the possibility of improvement in the items that received a grade 3.

In fact, Woori Financial Group's capital soundness is not a major issue. As of the end of last year, the Common Equity Tier 1 (CET1) ratio was 12.13%. The Bank for International Settlements (BIS) ratio also maintained a healthy level at 15.71%.

The problem lies in improving the internal control system. After the FSS inspection related to improper loans last year, Woori Financial Group has been making large-scale efforts to strengthen internal controls. They are renewing the internal control organization, expanding personnel, and even reorganizing the IT systems.

A representative example is the Fraud Detection System (FDS) that detects signs of abnormal transactions. Woori Bank's FDS system sends alerts and data to the responsible examiner immediately when signs of abnormal transactions are detected at branches, enabling prompt investigation.

In addition, separate from the command leave system operated by the banking sector, Woori Financial Group introduced 'Block Leave' to strengthen internal controls. This system is not a leave unilaterally ordered to audit employees unexpectedly but is a system that conducts internal control checks targeting team leaders at the manager level or above. Another pre-designated team leader directly inspects for improper conduct.

However, even if the subcommittee reaches a consensus on conditional approval, variables remain. The final decision is made at the FSC regular meeting. The FSS Governor can provide opinions at the FSC regular meeting. Earlier, FSS Governor Lee Bok-hyun said last month, "There can be various standards for exceptions related to subsidiary acquisitions, and we are discussing improvements by each standard," adding, "When the FSC plenary meeting makes a decision later, I will attend as one person and try my best to make a rational decision."

A senior FSC official said, "The agenda for Woori Financial Group's insurance company acquisition is proceeding according to laws and principles, so it is difficult to say when a conclusion will be reached," adding, "Once the subcommittee reaches a conclusion, it will be submitted as an agenda to the plenary meeting."