Kookmin's BIS Capital Ratio Falls Below 10%

By Kim Jae-kyoung
Staff Reporter

The financial meltdown has been averted with the $30 billion currency swap agreement lifeline, but the credit crunch is still lingering here, exacerbating the twin problems afflicting local banks ― solvency and profitability.

But the bigger concern is that weakness in the banking system may feed back into Asia's fourth largest economy, which is going downhill at a faster-than-expected pace in line with falling consumer and business sentiment.

Battered by the economic downturn, local lenders performed poorly in the third quarter, suffering worsening financial soundness. The prolonged downturn is exposing banks to a new set of credit losses in areas such as consumer and commercial property loans.

Weakening capital bases are perhaps the biggest concern of all. Korean banks' capital adequacy ratios deteriorated in the third quarter amid rising household debts, a wobbling property market and poor earnings.

In the three months to September, Kookmin Bank saw its Bank for International Settlement (BIS) capital ratio dip to 9.76 percent from 10.49 percent, the first time that its ratio fell below 10 percent since 2002.

The BIS ratio gives an indication of the solvency of a bank. It gives the ratio between the risk-bearing capital and the risk-weighted assets. While financial regulators require banks to keep more than an eight percent capital ratio, they recommend that lenders keep a ratio of 10 percent or above.

The comparable ratio for Shinbank Bank fell to 11.9 percent in the third quarter, from 12.5 percent a quarter earlier. The Korea Exchange Bank (KEB), owned by U.S. private equity fund Lone Star, saw its ratio slip to 10.64 percent from 11.56 percent. Woori Bank's capital adequacy ratio stood at 10.5 percent in September.

Non-performing loans for Kookmin and Hana decreased by 0.12 percentage points and 0.18 percentage points, respectively, during the third quarter. Overdue loan rates at Woori and Hana jumped by 0.13 percentage points and 0.17 percentage points.

The problem, analysts say, is that average default rates for loans extended to households and smaller companies still remain low but are bound to climb as the economy worsens.

Once the banks' soundness aggravates, it could impose further constraints on lending, which then contracts consumer spending and business investment, driving the economy into a deeper downturn. Banks' loans to smaller firms grew by only 2.6 trillion won in October, compared with a 5.5 trillion won rise in July.

Falling profitability is adding to the woes in the banking sector.

Hana Bank recorded a net loss of 71.1 billion won between July and September. Woori Bank saw third-quarter profits fall 46 percent year-on-year to 133 billion won. Net income for KEB fell by 22 percent to 150.9 billion won.

Kookmin Bank, the largest lender in Korea, saw its net profit dip by 36.36 percent to 563.1 billion won from 884.9 billion won the previous year. Shinhan logged a net profit of 214.3 billion won in the third quarter, down 32.2 percent from a year earlier.

On Friday, Moody's Investors Service cut its financial strength outlook on KEB to ``negative'' from ``stable,'' citing an anticipated deterioration in its creditworthiness.

On Oct. 1, the rating agency lowered the financial strength outlook for the big four banks _ Kookmin, Woori , Shinhan and Hana ― from ``stable'' to ``negative.'' It said the rating action reflects the anticipated difficulties of banks' overseas financing and soaring costs on the global capital market, which will affect profitability.

kjk@koreatimes.co.kr