By Kim Da-ye
Is Financial Supervisory Service (FSS) Governor Kwon Hyouk-se a truth-telling crusader or simply a whiner?
He has recently made headlines after boldly stating that local banks have paid too much in dividends and criticizing foreign brokerage houses that issued negative reports on the Korean economy.
Interviews with industry leaders and relevant figures reveal Kwon is more of the former.
On Tuesday, Kwon told chiefs of leading financial firms at a meeting that the high amount of dividends paid by them is problematic in the current economic climate.
He is said to have recommended the financial holding companies boost bank capital to meet the Basel III requirements. The accord, developed by the Basel Committee on Banking Supervision in response to the global financial crisis, will require banks to hold 10.5 percent of their assets as capital, beginning in 2013.
The financial firms’ current capital adequacy ratio under the standards of the Basel III is 13.5 percent on average, according to Yonhap, but the FSS predicts that the figure could lower as standards for recognizing their own capital will become stricter.
Kwon’s concerns are seemingly well-founded. All four financial holding companies paid far more dividends in 2010 than the previous year.
KB Financial Group paid out cash dividends worth 41.16 billion won or 47 percent of its 88.32-billion-won net profit last year, according to its annual report. In 2009, it paid 78.9 billion won in dividends from 539.81 billion won in net profit.
Woori Financial Group made 1.2 trillion won in net profit last year and paid dividends of 201.5 billion won, significantly larger than the 80.6 billion won paid out from the 1.03-trillion-won net profit a year earlier.
Shinhan Financial Group was modest in hiking dividend payments. It earned 2.38 trillion won in 2010, up from 1.31 trillion won a year ago, and distributed 586.24 billion won in dividends, up from 427.86 billion won.
According to its annual report, Hana Financial Group paid out 83.73 billion won in both 2010 and 2009 although the net profit shot up from 306 billion won to 1.01 trillion won.
Kwon on Aug. 12 slammed a foreign brokerage house’s report that said Korea is the most exposed to funding risks among eight Asian countries if the euro debt crisis worsens and global liquidity for lending dries up.
“Some foreign brokerage houses issued reports … that are based on subjective standards, not on objective ones. I hope they take more caution when they issue reports in the future,” he told heads of global financial firm’s local branches, according to a release by the FSS.
His comments were directed at Morgan Stanley’s Asia Credit Strategy report dated July 25. It said that high risks lurk in the Korean banking system, which heavily relies on borrowing from outside instead of using deposits as a lending base.
“Korean Banks, Asia’s most wholesale-funded in 2008 after Australia, were then the worst performing financial credits in Asia … but at the higher end both Korea and Australia are still exposed, although both have made deliberate attempts to bring that down since 2008,” the report said.
Kwon fought against the report with his own figures.
The portion of short-term foreign debts against the total decreased to 39 percent at the end of March from 52 percent in September 2008 and 48 percent at the end of 2007, Kwon said.
Overseas borrowing by local banks had also decreased with much of that reduction coming from short-term debts. The portion of short-term borrowing dropped to 42 percent in March from 53.6 in September 2008.
The FSS data also showed that the capital adequacy ratio under the Bank for International Settlements’ (BIS) standards went up to 14.34 percent in June from 11.35 percent two years ago.
Some experts share similar thoughts as Kwon.
When asked if banks’ overseas borrowing could threaten Korea’s sovereign rating, Kim Eng Tan, director of sovereign ratings at Standard & Poor’s, said that Korean banks’ exposure to risks from short-term overseas borrowings improved as regulators paid attention to it.
If a risk remains, it would be in local branches of major international banks that “continue to rely on parent funding,” Tan said. “Although the risk compared to back in 2009 is a lot less.”
The financial health of banks does remain an important factor in sovereign ratings because the government would be forced to rescue troubled banks.
One chief executive officer of a local brokerage house said that the information presented in the report is correct, but that it tells only part of the bigger picture of the Korean economy.
He said that a lot of foreign capital had flown into this highly liquid market, so it lost a lot as well. And when the global financial market sees risks in the slowdown of the U.S. economy and the European debt crisis disappear, Korea would emerge as one of the most attractive investment destinations, he said.
If such a view tells of the bigger picture, the overseas brokerage’s demonstrates the earlier, and probably worst, part.
It’s not the first time overseas brokerages or the foreign media have had a grimmer outlook on Korea than their domestic counterparts.
The brokerage chief explained that the difference between Korean analysts and foreigners’ views may stem from cultural differences.
“Some decisions made in Korea may look irrational to foreign investors who come from a different culture but study the situation closely because they have put a significant amount of money here,” he said.
“Those investors should share their concerns and thoughts with analysts and journalists abroad who may write from their perspectives.”
On Kwon’s decision to tell foreign financial firms to be careful in releasing negative reports opinions are divided.
One economic daily columnist pointed out that attempting to influence analysts’ reports and their opinions is an old method that cannot be accepted globally.
It’s problematic that a financial watchdog’s head is concerned with analysts’ report, the columnist said, adding that the authority should rather use its investigative rights to discover illegal practices such as shorting on shares after issuing negative reports.