Controversy is expected to flare up as some state-run banks are set to participate in the upcoming bidding for the government-led sale of Woori Financial Group units.

The state-funded Industrial Bank of Korea on Monday tendered the letter of intent to acquire Kyongnam Bank to financial authorities, one of the two provincial lenders of the public funds-injected Woori Financial.

IBK will vie for Kyongnam Bank with other potential bidders including Busan-based BS Financial Group, Daegu-based DGB Financial Group and a regional private fund in South Gyeongsang Province, all of which submitted the LOIs on the day.

NongHyup Financial Group also has expressed its willingness to join the coming bidding competition for Woori Investment & Securities.

Some market insiders say the banks’ moves run counter to financial authorities’ policy to retrieve taxpayers’ money, which was injected into Woori Financial in the wake of the 1997 Asian currency crisis, as the biggest-scale “privatization” project.

The critics, including some potential investors in provincial areas, say that it would be illogical if the final bids were not backed by capital from the private sector but state funds from government-owned firms.

“Should IBK, whose majority shareholder is the government with a 68.9 percent stake, actually bid for Kyongnam Bank, it would be an attempt not to privatize but nationalize it (the lender),” said the union of Kyongnam Bank in a recent statement.

NongHyup Financial Group has also been criticized for expressing interest in Woori Investment & Securities.

Opponents highlight the history of the financial group, which successfully spun off from the National Agricultural Cooperative Federation on the back of about 5 trillion won ($4.5 billion) in taxpayer money.

Some market observers alleged that financial authorities were intentionally creating “imaginary participation” of state-run investors in a bid to raise the bidding price by heating up the auction competition.

Meanwhile, six investors tendered their LOIs for auction of the other provincial unit, Kwangju Bank, of Woori Financial on the day.

While BS Financial and DGB Financial simultaneously made bids for Kwangju Bank in addition to Kyongnam, four others ― Shinhan Financial Group, Jeonju-based JB Financial Group, a fund in the Gwangju-South Jeolla region and employee shareholders of Kwangju Bank ― joined the competition for Kwangju Bank.

Regional political powers have continued to call for policymakers to sell the two banks (Kyongnam Bank and Kwangju Bank) back to investors residing in South Gyeongsang and South Jeolla provinces “as a swingback” to their positions as financial firms for the region‘s citizens before the 1997 crisis.

Based on preliminary applications from potential investors, financial authorities led by the Financial Services Commission are scheduled to single out several competitive investors.

Investors on the coming so-called short list will be entitled to conduct preliminary due diligence on the two Woori provincial banks and one brokerage house.

The government will then accept final bids from the candidates and select the preferred bidder in the coming months.

Woori Financial is the nation’s largest financial services company with total assets exceeding 400 trillion won. The government injected 12.7 trillion won in public funds into the group.

By Kim Yon-se (kys@heraldcorp.com)