By Kim Jae-kyoung
Staff Reporter
Local financial stocks are facing their biggest challenge since the 1997-1998 financial crisis, as they have been tumbling for the past few months in line with the collapse of the local stock market battered by the Wall Street crisis.
In particular, stocks for local financial holding firms and banks took precipitous falls after three global credit rating agencies voiced concerns about the soundness of the nation's banking sector.
Woori Financial took the biggest tumble, Wednesday, with its shares dipping 1,000 won or 8.8 percent to 10,500 won. Shinhan Financial stocks also plunged 3,200 won or 8.2 percent to 35,600 won, while shares for Hana Financial and Korea Exchange Bank (KEB) also fell sharply by 7.78 percent and 5.2 percent, respectively, to 24,900 won and 10,000 won.
Over the past three months, Hana stocks have fallen 38.1 percent, the biggest fall among local financial holding firms and banks, followed by Woori (-36.9 percent), KEB (-30.3 percent) and Shinhan (-24.7 percent).
``Korean financial assets have been especially hard hit, which we ascribe to commercial banks' dependence on capital market funding for asset growth,'' ING Group Asia's chief economist Tim Condon said.
``Rapid loan growth has forced Korean banks into the capital market for funding, which became a source of vulnerability when the credit crisis erupted in August 2007 and remains the Achilles heel of the economy today,'' he added.
The sharp fall was due mainly to the sluggish stock market coupled with a fall in financial stocks in advanced economies. However, market jitters that the country is heading for another financial crisis are exacerbating investor sentiment.
As credit rating agencies pointed out, it is not impossible that local banks will face a downgrade in their credit ratings and see a freefall in stock prices if global liquidity problems get worse down the road.
With fears over global economic recession growing, major banks are increasingly vulnerable to liquidity risks in the midst of a deepening global credit crunch.
Moody's Investors Service has recently lowered the financial strength rating outlook for the big four banks ― Kookmin, Woori , Shinhan and Hana ― from ``stable'' to ``negative.''
Moody's said the rating action reflects the anticipated difficulties of banks' overseas financing and soaring costs on the global capital market, which will affect profitability.
In its latest report, Standard & Poor's (S&P) said that pressure from the global liquidity squeeze threatens to negatively affect the credit quality of Korean banks, mainly due to their ongoing foreign currency funding needs.
``Korean banks are facing increasing difficulty refinancing maturing borrowings, with the cost of borrowing rising even as maturities shorten,'' the global rating firm said.
``If Korean banks' foreign currency liquidity problems are not addressed in a timely and efficient manner, this could lead to deterioration in the Korean banks' fundamental creditworthiness,'' it added.
It pointed out that the looming credit cycle poses a threat to all Korean banks, given their reduced ability over the last few years to absorb credit costs with earnings.
Fitch Rating also said that there are growing vulnerabilities in the banking system with regard to external funding needs, which are becoming more important with the global liquidity crisis tightening its grip on international credit markets.
In its recent report, the International Monetary Fund (IMF) warned that Korean banks will be more vulnerable to liquidity risks if the economy continues its slowdown.
``Some financial sector vulnerabilities have emerged, notably liquidity risks for banks reliant on wholesale funding,'' it added. ``Overall bank loan quality is strong but an economic slowdown could reveal vulnerabilities.''