FSC Press Release
(January 23, 1999)
Agreement on
Performance of Management Normalization Plan
between FSC and Hanvit Bank
On Friday, January 22, 1999, the Financial Supervisory Commission (FSC) and the Korea Deposit Insurance Corporation (KDIC) entered into an Agreement on Performance of Management Normalization Plan (hereinafter, Agreement) with Hanvit Bank. Hanvit Bank was officially launched on January 1 of this year as a result of a merger between Commercial Bank of Korea (CBK) and Hanil Bank and has been recapitalized last year utilizing public resources.
With the understanding that the success of Hanvit Bank, being seen as a national project with high momentum, will determine the potentiality of Korean financial institutions in terms of building global competitiveness, this Agreement affirms the government's intent not to engage in Hanvit Bank's daily operations, such as personnel or budget matters unless specified otherwise under this Agreement, related laws and regulations, or when KDIC as a shareholder exercises right granted under the Commercial Code.
Under the condition that Hanvit Bank faithfully performs the Management Normalization Plan, the Agreement will be terminated after two years at which point in time KDIC's aggregate shares fall below 50%. By faithfully performing this Agreement, Hanvit Bank is expected to form the foundation to surface as a leading bank through sound and autonomous management.
Synopsis of the Agreement
1. Progress to date
- Aug. 24, '98 : Commercial Bank of Korea and Hanil Bank entered into a merger agreement.
- Sept. 14, '98 : FSC approved the performance undertaking letter and execution plan of the conditions for governmental support.
* Based on "Conditions for authorization and fiscal support for merged financial institutions" (Sept.7, '98) announced by MoFE.
- Sept. 30, '98 : KDIC contributed 3 .264 trillion won to CBK & Hanil Bank.
- Oct. 31, '98 : CBK and Hanil Bank submitted detailed performance plan (MOU) for management normalization ("Management Normalization Plan")
- Nov.-Dec. '98 : FSC, with input from international consulting firms drafted the Investment Agreement.
* Consulted with Arthur Anderson for financial projection, McKinsey for strategic policy setting, and a law firm (Bae, Kim & Lee) for legal advice.
* Modified MOU for management normalization, and relieved some conditions of
TOR after incorporating realistic factors.
2. Content
- Essential Performance Matters
ㅇ Near-term profit improvement : Reduce redundant staff, branch network, and subsidiaries. Resolve non-performing loans by December 2000.
ㅇ Post Merger Management : Form a PMM team under the direct control of the CEO. The PMM team will receive consulting support for the next 2 years.
ㅇ Bad Asset Work-out : Form a bad asset work-out team by March 1999. Install an internationally-acceptable NPL classification system by January 2000.
ㅇ Recapitalization : Appoint a financial advisor and recapitalize by June 2000 after disposing bad asset.
ㅇ Key financial targets (1999-2000)
|
|
1999 |
2000 |
||
|
2/4 |
4/4 |
2/4 |
4/4 |
|
|
ROA |
△1.3 % |
△1.5 % |
0.6 % |
1.0 % |
|
ROE |
△20.0 % |
△22.0 % |
10.0 % |
15.0 % |
|
Cost Ratio |
60.0 % |
50.0 % |
45.0 % |
40.0 % |
|
Efficiency Ratio |
75.0 % |
65.0 % |
55.0 % |
50.0 % |
|
BIS Ratio |
9.5 % |
9.0 % |
10.0 % |
10.0 % |
|
NPL Ratio |
5.5 % |
3.0 % |
2.5 % |
2.0 % |
ㅇ Corporate Governance : Include in articles of incorporation corporate governance structure based on International Best Practice.
ㅇ Risk Management : Establish dedicated unit for risk management. Recruit external experts. Set up new risk management policies and procedures.
ㅇ Organization Structure : Implement full-scale business unit system by January 2000
ㅇ Performance based culture : Implement contract/performance based compensation system for employees. Set up job group classification and evaluation system.
ㅇ IT and MIS : IT integration as well as IT efficiency improvement and development.
- Mandatory Reporting
ㅇ Report the progress of normalization plan on a quarterly basis to the FSC and KDIC, subsequent to approval of board of directors and review of standing auditors
- Amendment to the Management Normalization Plan
ㅇ If Hanvit Bank fails to perform the management normalization plan as specified in the "Management Normalization Plan" due to changes in market conditions, changes in the relevant regulations, or other external conditions, the Agreement can be amended upon approval by FSC of proposed amendments submitted by Hanvit Bank.
- Orders to be imposed in the case of Non-performance of the Management Normalization Plan
ㅇ Capital reduction, disposal of assets, improvement in personnel and organizational administration, closure or consolidation of branches, imposition of restrictions on branch establishment or other adjustments in organizational structure, resolution of subsidiaries etc., whereas board members may be subject to cautionary warning notices or deduction of salary
- Term of Validity
ㅇ Effective from the date the Agreement is entered into and valid until, provided that Hanvit Bank faithfully performed its obligations, a successful issue of new shares or a successful sale of shares held by KDIC has been realized resulting in KDIC's share falling below 50%. Considering the time needed to establish a management structure that complies with international best practice, the Agreement will be valid for the first two years even if the government share falls below 50%.
ㅇ Terms of Reference(TOR) attached to the performance undertaking letter submitted on Sept. 14, '98 will be substituted by Essential Performance Matters.
- Sale of Stake in Hanvit Bank
ㅇ After consultation with FSC, KDIC will reduce its equity interest in Hanvit Bank as soon as possible through sale of such equity interest to strategic investors or domestic or overseas public offerings etc. in a manner which would maximize investment return of KDIC's stake.
- Exclusion of Government's Involvement in Management
ㅇ FSC and KDIC shall not engage in Hanvit Bank's daily operations such as personnel or budget matters unless specified otherwise under this Agreement, related laws and regulations, or the Commercial Code and other laws or regulations in relation to the rights exerciseable by the KDIC as a shareholder.