Strengthening Won Relieves Firms, Banks
By Kim Jae-kyoung
Staff Reporter
Local firms and banks heaved a sigh of relief Tuesday after seeing the local currency ending this year's last trading day in stronger territory than a month ago, with a stronger won preventing their balance sheets from turning uglier by cutting huge paper losses.
With regard to foreign currency assets, companies are obliged to book currency appraisal losses based on the year-end exchange rate. Therefore, even a minor depreciation can incur huge paper losses, hurting balance sheets significantly.
The local currency closed at 1,259.5 won per dollar Tuesday, down 3.5 won from the previous close. It had gained 209.5 won against the dollar from the end of last month when the exchange rate finished at 1,469 won.
The won's sudden rise came as financial authorities intervened in the market to support a stronger won to minimize foreign exchange translation losses for companies and banks. The central bank is estimated to have spent approximately $500 million to $600 million per day over the past week to bring down the exchange rate.
``The exchange rate fell by more than 200 won from the end of November. This is a real relief for banks and firms. Since firms have quite a bit in foreign currency assets, a stronger won will have their assets balloon once their foreign assets are converted into won,'' Woori Bank official Kim Ki-rin said.
``Banks can see an increase in their capital adequacy ratios with a rise in assets. In addition, a stronger won can improve local enterprises' balance sheets, which will make us set aside less in loan loss reserves,'' he added.
With the won-dollar rate falling to the mid-1,200 won level, companies with heavy foreign debts, such as airliners, automakers and steel makers, avoided snowballing currency appraisal losses.
In particular, small exporters, such as Taesan LCD, Jinsung TEC and Simm Tech, which signed up for the Knock-In Knock-Out (KIKO) method of foreign transaction arbitrage, headed off the worst case scenario. KIKO options allow businesses to sell dollars at a fixed won/dollar rate if the exchange rate stays within the range set in the contract. If it soars above the upper limit, however, exporters can sustain huge losses, as they have to buy dollars expensively on the foreign exchange market to sell them at the fixed rate to the banks.
Most major banks, including Hana, Shinhan, Woori, Citibank Korea and SC First, are also benefiting from the stronger won as they sold KIKO options to small exporters.
Hana Bank, which sold KIKO option to Taesan LCD, is the biggest beneficiary of the stronger won. It had to put aside 250.7 billion won in loss reserves associated with Taesan LCD. As a result, the lender recorded a net loss of 71.1 billion won.
In early December, analysts forecast that Hana Bank will suffer back-to-back net losses in the fourth quarter if the exchange rate stays above 1,400 won.
``Since the exchange rate has fallen to mid 1,200 levels, we don't have to set aside additional loss reserves for Taesan LCD,'' a Hana Bank official said. ``We are unlikely to suffer net losses in the fourth quarter.