What challenges loom for Woori Bank's privatisation?

Here are 3 reasons why Woori's not attractive to potential buyers.

The Korean government recently unveiled its plan to sell Woori Financial Group in three parts. Analysts reckon that selling the two regional banks and the brokerage subsidiary are likely to be easy but the privatisation of Woori Bank has tons of challenges ahead.

We talked to different analysts to know more about their thoughts on this privatisation. Here's what they have to say:

Standard & Poor's: HongTaik Chung, Researcher
Based on the announced plan of Woori Finance Holdings (WFH) privatization by the Korean government, S&P believes the sell-off of two regional bank subsidiaries and Woori securities would be relatively easy given some interested potential buyers in the market. But, we think the sell-off of Woori Bank (Woori) could be difficult.

In our view, there may not be significant potential buyers for Woori. The potential acquisition size of Woori will still remain quite large-scale considering the bank accounts for roughly 80% of total consolidated assets of WFH, the largest banking group in terms of consolidated assets in Korea.

We think potentially interested parties could find Woori not so much attractive given that 1) the bank’s credit profile is relatively weaker compared to other major domestic peers; 2) some competitive non-banking business could have been disposed earlier from the group level;

and 3) both the global and domestic banking/economic environment may turn into unfavorable for such large-scale acquisition in the coming few years. Additionally, if a major domestic peer acquires Woori, they may face some difficulty to generate significant synergy given many overlapping branches in Korea, in our view.

Fitch Ratings: Heakyu Chang, Director, Financial Institutions
The size of Woori Bank, and the government's intention not to sell it to a foreign buyer, means a complete sell-down of the state's stake will remain very challenging. Domestic purchasers of sufficient scale may lack the financial flexibility to make such an acquisition, especially with the tougher Basel III capital standards being phased in from December 2013.

We believe there is also a high chance for labour issues to arise, as a domestic merger would result in substantial branch overlap - particularly in the cities. Other potential obstacles are capital market conditions and any change in the political agenda after the election set provisionally for June 2014.

We are also less optimistic about the sale because the government has been attempting to sell its whole controlling stake in the group for the past decade. However, we believe Korea's intention to sell is much stronger now, as there is pressure to raise funds for the welfare initiatives that President Park Geun-hye laid out in the presidential election campaign.

The government is also looking to sell a non-controlling stake in Industrial Bank of Korea for the same reasons. We expect the government to remain price sensitive, although less so than before.

Moody's Investor Service: Hyun Hee Park, Analyst
Given previous failed government attempts to sell the group as a whole, it is likely that it will consider selling off the group’s subsidiaries separately. In particular, if the government opts to sell Kyongnam Bank and Kwangju Bank, both of which are subsidiaries of Woori Finance Holdings, it may provide strong incentives to regional banks that want to strengthen their own particular local franchises.