Rise in won leads to dip in bank ratios

The average capital adequacy ratio of local banks dropped in the first quarter of this year compared to the previous quarter, raising concerns over their risk-management capabilities, according to data released by the Financial Supervisory Service yesterday.

As of the end of March, the average capital adequacy ratio of 18 local banks including Shinhan, Woori, and Hana fell 0.3 percentage point to 14 percent compared to the 14.3 percent registered at the end of December, the FSS data showed.

The ratio, which is measured under the framework of the Basel II accord, measures banks’ abilities to deal with risks with the capital they have. The lower the ratio, the more vulnerable banks are to going insolvent.

“The reason why the ratio dropped is because banks’ equity capital dropped while their risk-weighted assets increased in the cited period,” said an FSS official.

By individual bank, the capital adequacy ratio of the Export-Import Bank of Korea was lowest at 10.53 percent while the ratio for Citibank was highest.

In the first quarter, equity capital held by banks dropped 500 billion won ($447.6 million) while their risk-weighted assets jumped 21 trillion won as they increased lending to small- and midsize firms as encouraged by the new Park Geun-hye government. SMEs are more vulnerable to external risks than large borrowers.

The rise in Korea’s currency also contributed to the increase in risk-weighted assets. As of the end of December, the average exchange rate was 1,071.1 won against the greenback while at the end of March it was 1,112.1 won per U.S. dollar.

“There are concerns that the current low economic growth and low interest rate trend will negatively affect banks’ earnings in the near future and affect their asset quality,” the official said.

By Lee Eun-joo [angie@joongang.co.kr]