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Weakening won raises concerns over banks' financial soundness
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By Lee Kyung-min
Korea’s major banks are facing mounting pressure over their deteriorating financial stability, eroded by the rapid weakness of the Korean currency against the U.S. dollar, market watchers said Thursday.
The won recently hit a seven-month low of 1,470 won per dollar, weakening by 70 won in just two months. This has hurt banks’ capital ratios as the government increases pressure to expand corporate lending as part of its “productive finance” drive.
The weaker won makes banks’ financial soundness look riskier on paper, because their U.S. dollar assets including loans, investments and derivatives become larger when converted into won. This happens because banks’ Common Equity Tier 1 (CET1) ratios, a key indicator of their financial soundness, becomes lower.
The ratio is measured by bank’s core capital divided by its risk-weighted assets (RWA). When the won weakens, the value of U.S. dollar assets converted to won rises, leading to higher value of RWAs. This in turn lowers the ratio, unless banks increase their capital.
According to financial market data, KB Financial’s ratio came to 13.83 percent as of September, followed by Shinhan Financial’s 13.56 percent, Hana Financial’s 13.30 percent, Woori Financial’s 12.92 percent and NH NongHyup Financial’s 12.34 percent.
However, the figures are likely to drop further in the fourth quarter if the currency weakness continues.
The concern is valid, since their ratios dipped by as much as 0.3 percent in December last year following former President Yoon Suk Yeol’s martial law declaration.
This is compounded further by Lee Jae Myung administration’s drive to grant more borrowing opportunities for corporate entities as part of efforts to help small and medium-sized enterprises (SMEs).
The combined SME loans extended by the country’s top five banks came to 675.8 trillion won in October, up 4.7 trillion from the previous month.
This is a sharp increase, especially given that the total increase in the first six months of the year came to 1.8 trillion won.
The SME support drive helps boost growth. However, banks’ asset quality and capital ratios come under pressure, since corporate loans have higher default risks than household mortgage lending.
Many say banks are in a dilemma, having to strike a balance between extending loans for the country’s economic growth and maintaining healthy capital amid the weakening won.
“Corporate lending growth despite the won weakening will come at the expense of banks’ financial stability, requiring them to put aside capital buffers,” an industry official said.