Why KB Financial is a better bidder than NongHyup Financial for Woori Investment & Securities

KBFG has a stronger financial profile than NHFG.

Last Friday, Woori Finance Holdings Co., Ltd. said that it will sell its brokerage unit, Woori Investment & Securities Co., Ltd., and five other affiliates as part of its privatization process.

Two bidders have already emerged for WIS: KB Financial Group, the parent of Kookmin Bank, and NongHyup Financial Group, the parent of NongHyup Bank. 

According to Moody's, an acquisition by KBFG would be credit positive for WIS, but an acquisition by NHFG would be credit negative because KBFG has a stronger financial profile than NHFG.

Here's more from Moody's:

The WIS sale will be bundled with Woori Asset Management, Woori Aviva Life Insurance) and Woori FG Savings Bank.

However, WFH has not ruled out separate bidding for these three affiliates. Woori Financial and Woori F&I Co. will be sold separately. WFH will announce the preferred bidders by year end and will complete the sales by early 2014.

KBFG is the fourth-largest financial group in Korea by assets and has a solid financial profile supported by its main operating bank, Kookmin Bank, which is the country’s largest bank with a market share of 17% by deposits and 14% by assets as of the end of March.

In addition, KBFG’s low double leverage ratio7 of 100% at the end of June places it in a strong position to support WIS.

Conversely, NHFG’s modest financial profile would limit its capacity to support WIS. NHFG is the fifth-largest financial group in Korea by assets, and its main operating bank, NongHyup Bank, had a market share of 13% by deposits and 11% by assets as of the end of March.

NongHyup Bank is a policy bank for the agricultural sector, whose higher credit costs and obligation to support the National Agricultural Cooperative Federation (NACF) would limit its support of WIS.

NongHyup has to pay NACF an annual brand fee of around KRW470 billion, which amounts to nearly half its net profit. It also faces high dividend pressure to support NACF and NHFG’s reorganization expenses.

In 2012, the bank’s dividend payout ratio was 72%, versus an industry average of around 25%, which testifies to its weaker ability to retain earnings. Moreover, NHFG’s double leverage ratio was 106% at June 2013, versus KBFG’s 100%.

Both KBFG and NHFG would be able to strengthen their non-banking business with the addition of WIS, which operates on a much larger scale than their own securities companies.

WIS is the largest securities company in Korea by assets with a 6.7% market share in brokerage. As of June, it had KRW 27.6 trillion in company assets and KRW137 trillion in customer assets.

KBFG owns KB Investment & Securities, which had total assets of KRW5.8 trillion and a 2.4% market share in brokerage with 11 domestic branches. NHFG operates NH Investment & Securities, which had total assets of KRW6.3 trillion and a 1.2% market share in brokerage with 32 domestic branches in June.

The government announced its fourth attempt to privatize WFH on 26 June. Under this plan, the government will separately sell WFH’s three different business units – regional banks, brokerage units and Woori Bank  – by the end of 2014. The government owns a 56.97% stake in WFH, which in turn owns a 37.9% stake in WIS.