State banks' financial soundness worsening amid pandemic

By Anna J. Park

State-run banks' financial soundness has been deteriorating, as their capital adequacy ratios are on a steady decline as a result of expanding financial aid for local firms hit by the COVID-19 pandemic.

According to the Financial Supervisory Service (FSS), the Bank for International Settlement (BIS) capital adequacy ratio for Korea Development Bank (KDB) stood at 13.33 percent at the end of March, down 0.73 percentage points from 14.05 percent at the end of last year.

The ratios for Export-Import Bank of Korea (Eximbank) and the Industrial Bank of Korea (IBK) also fell to 13.73 percent and 14.26 percent, respectively, from 14.56 percent and 14.47 percent during the same period.

The BIS ratio, a barometer for banks' financial soundness, is the proportion of a bank's capital to its risk-weighted assets.

The state-run banks increased loans to local businesses, supporting small- and medium-sized companies and the nation's key industries as well as stabilizing corporate bond markets.

Yet a bank official from one of the state-run banks said the government plans to buttress the banks' capital to revive the nation's economy through another supplementary budget soon to be executed.

“The bank is expected to expand its capital, as the government plans to back the state-run banks through the third supplementary budget,” the official said.

Through the third supplementary budget, the government has decided to inject an additional 1.66 trillion won ($1.38 billion), 380 billion won and 490 billon won in KDB, Eximbank and IBK, respectively.

Market analysts said the current level is a natural consequence of increased loans during the pandemic, and it hasn't reached a worrisome level, considering most countries' easing of monetary policies to support national economies.

“What one also needs to consider is that the government plans to apply new international standards to assess credit risks in calculating the ratio from the end of this month,” said Kang Hye-seung, analyst from Mirae Asset Daewoo.

“With the new standard adopted, the banks' capital adequacy ratios are expected to increase by about one to three percentage points from the third quarter of this year.”