Korea's bank privatisation plans hammered with operating difficulties: Fitch

But efforts will go on.

The Korean government's bank privatisation plan will continue to face challenges as the sector faces a difficult operating environment in 2015.

According to a release from Fitch Ratings, nonetheless, it expects the government to continue with efforts to reduce its ownership of several key banks, due to rising fiscal pressures and budgetary commitments.

The failure of the recent block sale of a controlling stake in Woori Bank, reportedly valued at USD2.7bn, is indicative of the difficulties Korea faces in its bank divestment plan.

The government has long been interested in divesting of its stake in Woori, but the sale was suspended on 4 December after it received only one bid - less than the minimum two that were required.

The May 2014 decision by Korea's lawmakers to reverse a plan to fully privatise Korea Development Bank (KDB), also in part reflected the prolonged difficult business environment for the banking sector.

This was the fourth attempt to sell a controlling interest in Woori, and reaffirms Fitch's view that the sale would be challenging, especially given government's reluctance to sell it to a foreign institution.

Korea's banking sector is facing a number of headwinds from a subdued operating environment and intense competition, which is dampening banks' profitability and growth prospects.

Fitch forecasts 2015 RoA for commercial banks to be similar to that estimated for 2014, at 0.4%.

Here's more from Fitch Ratings:

Notably, foreign-owned commercial banks operating in Korea, including Citibank and Standard Chartered, are scaling back their operations.

Fitch downgraded Standard Chartered Bank Korea's Viability Rating to 'bbb' from 'bbb+' on 10 October due to weakened profitability and strategic downsizing (our Outlook is Negative, reflecting that on the parent).

Yet despite the challenges, government was able to sell a 3.8% stake (down to 54.6%) in policy bank Industrial Bank of Korea (IBK) on the day after it suspended the Woori sale.

Furthermore, the Financial Services Commission announced that government would be selling a smaller 5.9% Woori stake for USD407m in a separate auction (which would bring the government's holding to 51.1%).

Government is likely to remain focused on selling down its stakes in Woori and IBK to align with its economic policy to boost growth and make the banking system as a whole more commercially driven.

That said, government is also expected to remain committed to retaining an absolute majority stake in the country's policy banks, including IBK and KDB.

This is in line with the new KDB Act passed in May 2014 and the government's plan to realign the state's policy financial institutions announced in August 2013.

Korea's policy banks play a key role in the country's banking system, accounting for around 25% of overall loans.

Government has a very strong track record of injecting capital into the policy banks when needed, and Fitch's ratings reflect the de facto solvency guarantees provided by the sovereign for these banks.

Fitch maintains that the government's exit from a key private lender like Woori would improve governance and operations over the long term.

Political changes have led to the replacement of key managers at Woori, resulting in a lack of consistency in long-term strategy.