Seoul suffers as Woori woes spread

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By:
Elliot Wilson
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Within the space of a few weeks, Woori Bank, South Korea’s second-largest lender, was slammed in parliament, lost a chief executive and prompted an investigation into hiring practices that may suck in the entire financial industry. What happens next is anybody’s guess.

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The problems started for Woori Bank on October 17, when Sim Sang-Jung got up to speak to South Korea’s National Assembly. A cheery left-wing firebrand in the mould of US senator Elizabeth Warren and one of five politicians to stand for president in May, Sim was used to being heard.

Her message to the nation’s parliament that day was direct and damning. Woori Bank, Korea’s second-largest lender by assets, had bought financial favours, she said, by offering plum entry-level jobs to the children of the wealthy and well-connected, including senior figures at the financial regulator and the national spy agency. The evidence was contained in documents presented in parliament by the lawmaker that were, sources say, leaked to her office by disaffected bankers inside Woori itself.

In a society being torn apart by allegations of corruption and fraud at the highest levels – 2017 alone has seen a president impeached and the most powerful business figure sent to jail – the charges hit hard. And stuck.

Within hours Choe Heung-Sik, head of the financial regulator, had apologised, calling the incident “regretful” and pledging nuts-and-bolts reforms designed to regain public trust and boost transparency.

The following week, the state audit agency launched a probe into potential hiring irregularities at seven publicly owned financial institutions, including policy lender Korea Development Bank, Korea Exchange, the nation’s primary stock exchange, and Korea Deposit Insurance Corporation (KDIC), a state body that owns 18.5% of Woori Bank.

At first, Woori’s chief executive Lee Kwang-Goo seemed to dig in his heels, ignoring calls for him to show contrition and leave. But when deputy prime minister Lee Joon-Sik called an urgent ministerial meeting expressly to discuss the Woori problem, Lee caved. On November 2, at an emergency board meeting, he tendered his resignation, offering his “sincere apologies” and bearing full responsibility for the scandal.

What happens next will be instrumental in divining the future not just of one of Korea’s largest and most-important lenders, but also the future of the financial sector and, potentially, even the direction of the economy itself.

For Woori, the immediate aim in the wake of the hiring scandal was clearly to exude an air of breezy business-as-usual, while scrabbling around furiously behind the scenes to secure a new chief executive.

When Asiamoney visited the bank’s headquarters in Seoul in late November, the building seemed preternaturally quiet, as though everyone was waiting for the storm to break.

'Nothing to worry about'

Lee Joeng-Soo, the bank’s general manager of investor relations, was waiting politely on the eighth floor, in pin-drop silence. He led the way into an even quieter antechamber, where he sat with a deputy, looking both eager to please and deeply uncomfortable.

To break the ice, it seemed apt to ask what message he would like to extend to the bank’s growing army of local and foreign shareholders. It was, after all, only in November 2016 that the bank sold a 29.7% stake to seven domestic financial institutions, including IMM Private Equity and Mirae Asset Global Investments, raising $2.1 billion and cutting the government’s stake to 21% from 51%.

In the second half of 2017, it sold smaller stakes to a strong cast list of foreign investors, including Kentucky based Todd Asset Management, Chicago’s Northern Trust and Ohio-based investment adviser Gratry & Company.

“My message to all the investors would be that there is nothing to worry about,” Lee said, smiling but shifting in his seat. How about the search for a new chief executive?

“Technically, we still have one,” he replied, noting that under Korean law, even if a chief executive is sacked for gross misconduct, he retains (if only in theory) his title until a replacement can be found.

“But,” added Lee, “he has expressed his will to step down from his post as he wanted to take moral responsibility for the bank regarding the illicit hiring issue.”


He is not an unlucky CEO. It remains to be seen, and it will all come out in the official investigation, but it is widely perceived as unlikely that he didn’t know this was going on 
 - Park Ju-Gun, CEOScore

And when will a new CEO be announced? Lee seemed on surer ground here. An eight-strong panel, he said, comprising two internal board members, a non-executive director nominated by the KDIC, and five others chosen by the bank’s largest private institutional shareholders, including Korea Investment & Securities, Tong Yang Life and Kiwoom Securities, had been charged with finding the bank a new leader.

Until then, the head of the bank’s global business group, Sohn Tae-Seung, was acting as de-facto chief executive and “trying hard to do a great job for us”, Lee said. “We are hopeful that the whole process of electing a new CEO will be finalised by the end of year, and we are trying to minimise the impact of the vacancy.”

Lee was reticent about providing too much colour or context – though market sources say a shortlist of two candidates to replace Lee, one internal and one external, has been drawn up. He said with the scandal “still under investigation, we cannot legally say anything regarding the matter”.

A long pause ensued, which he filled unaided: “But there is nothing to worry about in terms of our operations and in terms of selecting a new CEO.”

Much of course remains unanswered: events are fluid and moving fast.

On November 28, a day after Asiamoney’s interview with Woori, prosecutors armed with warrants entered the bank’s headquarters in Seoul’s Jung district and took into custody three officials working in its human resources department, on charges of obstruction of business. Local media said prosecutors were grilling the trio about their role in the illicit hiring, and whether Lee, as CEO, had ordered it.

Another set of prosecutors entered the building the same day, to seize evidence, while Lee’s former office was searched.

Two days on from that, acting-CEO Sohn was handed the top job, and took on responsibility to bring order and balance to a bank struggling for direction and stability.

But with the state audit agency not set to deliver its report on the hiring scandal until early 2018, it is worth posing a few key questions.

Three spring to mind: is this indeed a real scandal? If so, how deeply does the problem penetrate the financial sector? And, how do events at Woori fit into a wider sense of anger directed at wayward corporates and lenders that extend preferential jobs to the offspring of the elite?

First up, Woori itself. The bank has always been something of an oddity, neither fish nor fowl. For perhaps too long, experts say, it has been torn between hewing to the demands of its public-sector masters, who effectively controlled the lender until late 2016, and a desire to control its own destiny as a now majority-private-owned lender.

Pause, rewind

To understand the bank’s split identity is to rewind 20 years, to the 1997/98 Asian financial crisis that all but bankrupted the country. From the wreckage of this painful episode, dubbed the ‘IMF crisis’ by Koreans, many of whom blame the Bretton Woods institution for much of the austerity imposed on ordinary citizens, a new banking sector sprung forth.

Hanvit Bank, one of the new institutions, was formed by jamming together two large but struggling lenders, Commercial Bank of Korea and Hanil Bank, with the smaller Peace Bank, using Won12.8 trillion ($11.8 billion)-worth of taxpayer money. Woori’s name was adopted in 2002.

Over the ensuing years, many of Woori’s commercial peers, also saved from oblivion by late-1990s bailouts, were returned to private-sector ownership. But Woori remained stubbornly in state hands. Three times between 2010 and 2016 the government sought to sell a 30% stake, only to be thwarted by high valuations and a lack of bidders, before it finally flopped over the line.

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Politician Sim Sang-Jung

Its obeisance to its state masters helps explain why Woori was, if Sim Sang-Jung’s accusations are proven correct, so willing to hand prized bank jobs to relatives of the mighty.

“Because it was owned 51% by the state, government officials have over the years asked Woori to get jobs for their family members,” says Jongmin Shim, a banking analyst in Seoul at CLSA.

A leading Seoul-based banker adds: “This has been going on for years at Woori. In a sense, there’s nothing new to see here, it happens all the time.”

So why has Woori Bank taken such a shellacking over the affair – and why is the scandal only breaking into the open now?

That is the trillion-Won question, yet precious few well-connected individuals in Seoul are willing to discuss it publicly, or even on background. Even most bank analysts are chary about going on the record.

“It’s deeply sensitive,” says one local expert. “This is a society that likes to conform. It does not reward the whistleblower.”

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Park Ju-Gun,
CEOScore

One individual who clearly does not feel the need to toe the line is Park Ju-Gun, founder and president of CEOScore, a Seoul-based research firm that analyses the management performance of domestic corporates.

His offices in the Jongno-gu business district are a mix of the mundane and the mildly exotic. Air purifiers jostle for space with framed Chinese calligraphic prints, while a bookshelf groans under the weight of titles like ‘Rule breaker’ and ‘Bad Samaritan’.

Did the hiring scandal at Woori surprise him?

Park thinks for a long moment before shaking his head.

“No,” he replies. “The bank might be privately run now, but when these people were hired in 2016 and late 2015, it was still controlled by the government.”

And is the problem limited to Woori, or is it symptomatic of a wider malaise? “Most people know preferential hiring goes on. But this is the first time a big bank has been caught up and implicated in this kind of scandal.”

What though of the outgoing Woori chief executive, Mr Lee. Is he complicit in the scandal? Or was he simply unlucky, a CEO in the wrong place at the wrong time, taking the rap for an institutional problem that lay concealed for years, explained away as the cost of doing business, only to very suddenly and very visibly spill into the open?

Park shakes his head again: “He is not an unlucky CEO. It remains to be seen, and it will all come out in the official investigation, but it is widely perceived as unlikely that he didn’t know this was going on.”

Document

And what of the hiring scandal itself – is it really so great, worthy of so many investigatory man-hours and office raids?

Park smiles again and fishes in a drawer for a sheet of paper filled with names and figures. “This is the document that [the lawmaker Sim] held up in parliament, and it’s really interesting.”

Park points to the first column, which contains the names and positions of the cream of Seoul society.

“This guy is a university chancellor; this one’s a senior military figure. Here, a senior guy at the financial regulator [the Financial Supervisory Service] and the spy agency [the National Intelligence Service].”

The second column contains the names of each of the lucky and well-connected children hired in 2016 by Woori – 16 in total out of an annual intake of 150.

It needs to be asked though – in the grand scheme of things, how ‘wrong’ is this practice? Institutions of all types, from corporates to banks and multilaterals to governments, are filled with the progeny of the powerful, at least some of which attain their position through sheer hard graft. When a scandal like this breaks into the open, it’s rarely a surprise to insiders.

And seldom do, say, commercial lenders find themselves so comprehensively and individually targeted by lawmakers. The example of JPMorgan, which paid $264 million to the US Department of Justice in November 2016 to settle claims that it hired the children of senior Party officials to win business in China, merely highlighted a problem that was rampant in Asia’s largest economy.

The real problem for Woori, though, was not the act of hiring itself, but the pay-off that ensued.

To that end, it is the last column of Park’s spreadsheet that’s the charm. It explains why Sim was so confident in making her claims in parliament on October 17, and why the state audit agency and Woori itself take the matter so seriously.

Some of the tabs in the column are blank, but a few include some pretty hefty sums of money. One is for Won193 billion ($180 million), allegedly transferred from a regional government (the document does not say which) to Woori Bank in exchange for them hiring the son of a regional deputy mayor. Another is for Won500 million, an amount transferred to the lender by one of its largest corporate clients.

“This is why they hire the children of the powerful,” Park continues. “Banks need these relationships. And the head of a hospital or a provincial authority or a wing of the military – they have huge transaction-banking needs. A university may employ 1,500 people and control significant assets”, including endowments.

“Money flows into and out of these institutions all the time. Salaries and pensions need to be paid,” says Park. “This is business that banks really want and need.”

Viewed in this light, it’s easy to see why state inspectors would be so keen to investigate a case that, in the eyes of some, appears less like ‘hiring irregularities’ and more like old-fashioned bribery.

Root problems

There is a curious footnote to the Woori story: that of how it got into the public realm at all. Seoul is not a city known for its palace intrigue, but few in the city’s close-knit banking sector doubt that the damning list of names was deliberately leaked to the cheery lawmaker Sim.

Woori’s problem is that precious few of its senior executives have any affection for the bank’s name. Many yearn for the old days when they were employees of either Hanvit Bank or Commercial Bank of Korea (CBK). For a long time, the two factions were kept happy by a simple rotation of the top positions. In Korea, bank chiefs typically serve two-year terms, a tenure that is occasionally extended to three or four years with the board’s support.

So when the term of former Woori chief Lee Soon-Woo, an erstwhile CBK banker, ran its course in 2014, the Hanvit clique awaited its turn in the sun. But that didn’t happen. Instead, the board nominated Lee Kwang-Goo, another CBK name. Worse, when his two-year term expired, it was immediately renewed until the end of 2018.

That, says a long-standing senior executive at a foreign lender in Seoul, explains how Sim got her hands on the evidence.

“It was a leak, pure and simple,” he says. “Woori is always in a state of internal feuding, with staff challenging each other for the CEO’s role. If a Hanvit guy had been given the top job in 2014, or if Lee hadn’t been granted a second term by a board desperate for stability ahead of the privatization, my guess is none of this would have happened.”

To this end, it is hard to feel even a modicum of pity for the bank. Whether the data was leaked by accident or deliberately by embittered internal saboteurs, the evidence as it stands points to a bank in desperate need of leadership. More will be revealed in 2018, and it may be more damning.

But there are a few that see Woori as a victim of circumstance. Seoul is currently undergoing one of its regular ruptures, where an old way of thinking and acting is discarded and a new one speedily adopted.

Rupture

This can happen astonishingly fast in such a young democracy; when it does, it is driven by an angry and self-motivated public.

This rupture has been underway for a few years and involves a broad pushback against corruption, fraud, inequality and entitlement, allied to the widespread sense among young graduates who lack either wealth or connections that too many prime jobs are set aside for the progeny of the elite.

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Heather Cho surrounded by media

If any incident encapsulates this chapter in Korea’s embrace of people power, it was Heather Cho’s meltdown in December 2014. An executive at Korean Air, Cho had boarded a flight heading from New York to Incheon Airport in Seoul; she was settling into her first-class seat when she took umbrage at being handed a portion of nuts still in their package, not on a plate. Cho flew into a rage and ordered the pilot to turn the plane around and return to base. 

Fury at the so-called ‘nut rage’ episode was unbounded, in large part because Cho ticked all the wrong boxes. She was the daughter of Cho Yang-Ho, chairman of the state airline, and the granddaughter of its founder. And she was perceived as having secured her elevated position – rather ironically, as head of onboard customer service – because of her direct family connections.

Not long ago, Cho would likely have been given a slap on the wrist. Yet within months, she was handed a 12-month sentence for violating plane safety, later reduced to 10. Nor was this a one-off. In July 2016, a sister of the chairman of Lotte Group, one of Korea’s largest conglomerates, was convicted on charges of bribery and embezzlement.

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Park Geun-Hye, South
Korea’s first female
president

If anything, 2017 has served up some even-more eye-watering moments, most notably the impeachment of South Korea’s first female president, Park Geun-Hye, and the jailing of Lee Jae-Yong, vice-chairman of Samsung Group and arguably the country’s most powerful person, on charges of bribery and embezzlement.

And this is probably just the start.

Kim Geo-Sung is a former executive at the Korean arm of Transparency International, and now inspector general at the Office of Education in Gyeonggi-do, the country’s most populous province, lying on the border with South Korea’s recalcitrant northern neighbour.

He says: “People want justice, not corruption. There should be no exceptions; everyone knows this. The Woori Bank scandal is about people power, and that power is only growing.”

Forty years ago, he notes, people paid bribes to traffic cops, while parents pressed money into the palms of teachers in the hope of bumping their kids grades up a bit.

“That almost never happens now,” he says. “There’s no corruption at the bottom of society. Instead, the corruption is all at the very top level, the level of CEOs and ministers.”

Tackling this issue is vital for the health and vitality of Asia’s third-largest economy. Korea’s score in TI’s Corruption Perspectives Index has degenerated since the financial crisis.

Once on track to improve to around the 70 mark by now (the higher the score the better), it has plateaued since 2008, leaving it becalmed in the mid-50s, ranked below the likes of Rwanda and Mauritius.

Current president Moon Jae-In is “determined to tackle this scourge,” says Kim. “Within his five-year term, he wants to make us a top-20, and even a top-10 economy in terms of low corruption levels. It may not be possible, but the ambition is good. To get to where we need to be, everyone needs to understand that corruption is wrong. In Gyeonggi-do, we teach anti-corruption education even to kindergarten students.”

What happens next? For Woori Bank, the next few months are likely to get worse, and may well become gruesome.

Under outgoing chief executive Lee, the lender performed well, posting a pre-tax profit of $1.05 billion in 2016, up 16% year on year. Its shares hit a record high on July 28 of Won19,100, though they have since fallen back, losing 16% of their value in the wake of the hiring scandal. The bank’s common equity tier-1 (CET1) ratio was 10.9% at the end of June, against 8.8% at the same time in 2016.

Woori’s chief executive will enter the fray facing four main challenges. First, to tackle internal factionalism and imbue the divided lender with a sense of communal identity – no easy feat. (In his first public address after landing the job of Woori’s new chief executive on November 30, Sohn, a former Hanvit Bank man, promised to “do his utmost” to resolve factional disputes and create an “inclusive leadership).

Second, to complete the divestment of KDIC’s remaining 18.5% stake in the lender. Plans to do this were put on ice in October; insiders say the bank now aims to raise $450 million by offloading a 7% stake in the first half of 2018.

Third, to bring a sense of perspective and moral clarity to the lender that it clearly lacks at present. 

Finally, to force Woori, with its 22 million customers served by 887 domestic branches, to think and act like a proper, dynamic, private-sector lender driven by the profit motive.

This will not be easy. For too long, analysts say, Woori diverted too much of its capital into slow-growing state-dominated industries like steel production and shipbuilding, while overlooking the fast-growing services sector.

Ratings

That explains why the bank’s results have at times been so volatile, with Woori posting record profits in 2012, skidding to a loss of $656 million the following year, then clawing itself back into the black.

It also explains why Woori Bank’s credit is ranked ‘A’ by S&P Global Ratings, a single notch below all of its big domestic peers – KEB Hana Bank, KB Kookmin Bank and Shinhan Bank.

Not that any of those lenders can afford to feel smug. There is a final question to ponder here: will Woori’s problems prove to be a one-off, or will prosecutors, emboldened by their power and public support, seek evidence that the hiring scandal goes further and deeper, filtering into every corner of the banking sector?

Here, analysts are split. One notable name reckons the rot will stop at Woori’s door and go no further, but others aren’t so sure.

“For me, this is just the beginning,” says CEOScore’s Park. “All the banks, even the really good ones, have the same hiring practices, so the prosecutors will go after every one. The big question is how much prosecutors will find.

“It’s one thing to leak to a friendly politician, but if no one is willing to talk, and if there is no documentation pointing to illicit hiring, there’s little that even the best prosecutors can do.”