CEO Severely Disciplined for Incomplete Sales... "Banks' Private Equity Fund Sales Will Be Greatly Restricted"

FSS Issues Severe Disciplinary Actions to Woori and Hana CEOs Over DLF Scandal
Bank Fund Sales Expected to Shrink Significantly... Non-Interest Income Likely to Decline
Uncertainty Grows Over CEO Reappointment, Governance, and M&A Plans Due to Sanctions

[Asia Economy Reporter Kim Hyo-jin] The Financial Supervisory Service (FSS) has imposed heavy disciplinary actions on the CEOs of Woori Financial Group and Hana Financial Group, holding them accountable for the overseas interest rate-linked derivative-linked fund (DLF) scandal that caused massive principal losses. Amid this, there are forecasts that the sales of private equity funds by financial holding companies will shrink in the future.

Jeon Bae-seung, a researcher at Ebest Investment & Securities, said on the 31st, "The FSS decided on heavy disciplinary actions against the management for the failure of internal controls," adding, "The impact on the profits of financial holding companies is not significant, but there are concerns about restrictions on securing non-interest income."

According to Ebest Investment & Securities, as of the end of November last year, the balance of private equity fund sales by banks reached 26 trillion won. Researcher Jeon expressed concern, saying, "After the DLF incident, the sale of high-risk private equity funds by banks has been banned, and considering the six-month suspension of private equity fund sales imposed on penalized banks and the fund run issues, additional private equity fund sales will not be easy in the future." Taking into account a sales commission fee of about 1%, he estimated that the average commission income of the four major banks would decrease by around 50 billion won.

The balance of private equity fund sales by securities firms amounts to 331 trillion won, which is significantly higher than that of banks and increased by 63 trillion won last year. Researcher Jeon predicted that if anxiety related to private equity funds spreads, the decline in earnings of securities subsidiaries within financial holding companies will be even greater.

The overall impact on financial holding companies (banks + securities) due to the contraction of private equity funds was estimated at an average of 90 billion won per company. It was judged that this is not large, accounting for around 2% of pre-tax profits.

Researcher Jeon said, "The issue seems to be limited to certain types of private equity funds, so the actual impact will be less than this. However, under conditions where it is difficult for bank holding companies to increase interest income due to this year's decline in net interest margin (NIM), the overall contraction of non-interest income is a negative factor for performance."

The FSS held a disciplinary review meeting the day before and issued a heavy disciplinary action, a 'written warning,' to Sohn Tae-seung, Chairman of Woori Financial Group and CEO of Woori Bank, and Ham Young-joo, Vice Chairman of Hana Financial Group (who was CEO of KEB Hana Bank at the time of DLF sales), holding them responsible for the DLF scandal.

With this disciplinary action, Chairman Sohn's reappointment has been stalled, and Vice Chairman Ham's challenge for the successor position of Kim Jung-tae, Chairman of Hana Financial Group, has become difficult. Those who receive heavy disciplinary actions cannot be employed in the financial sector for the next three years.

The market expects that uncertainties related to CEO reappointments, governance, and future new business (M&A) initiatives will expand due to this sanction.

Jo Bo-ram, a researcher at NH Investment & Securities, said, "The heavy disciplinary action against the bank's management may lead to a short-term deterioration in investment sentiment regarding governance," adding, "Appropriate and prompt follow-up measures related to the management vacancy are important for mid- to long-term stock price stabilization."

Researcher Jo further diagnosed, "Although there is a possibility of further decline in non-interest related profits, we do not expect significant changes in the investment opinion on the banking sector or the net profit forecasts for the financial holding companies this year."

This content was produced with the assistance of AI translation services.