Basel III may rein in growth plans

Korean banks are unlikely to pursue aggressive growth as they focus on building up sufficient capital to meet the requirements of Basel III requirements, the U.K. credit rating company Fitch said yesterday.

Basel III, a voluntary regulatory standard for capital adequacy and liquidity risk that aims to reduce the odds of another worldwide financial crisis, will go into effect later this year.

The London-based company said major Korean banks will likely remain conservative in their lending and avoid large mergers and acquisitions.

“We do not expect their Basel III capital ratios to change significantly from their current Basel II ratios,” Fitch said in a statement.

“But the banks are likely to conserve more capital to meet the higher buffers, especially for the banks designated as domestic systemically important banks.”

Fitch estimated the equity tier 1 ratio as of March was 10.4 percent, well above the 4.5 percent minimum requirement, as well as the 2.5 percent capital conservation buffer expected to be phased in from the end of this year through 2019.

“The overall impact is limited for Korean banks because almost three-quarters of regulatory capital is already common equity,” the report stated. “The regulator estimated the system’s end-2012 total capital adequacy ratio should be boosted slightly by 22 base points when Basel III is fully implemented - due to Korea’s conservative treatment of some revaluation reserve items under Basel II.”

The report added that financial holding companies are expected to undergo more significant changes. “We expect the adoption of Basel II and Basel III to substantially strengthen holding companies’ risk management procedures as they develop their own internal rating models over the next few years,” the report claimed. “The new requirements should also encourage bank groups to reduce leverage.”

The report added that while most major holding companies in the banking groups are able to meet the Basel III requirements, it noted that Hana Financial Group is at risk as its tier 1 ratio is 7.9 percent after acquiring Korea Exchange Bank last year.

“We expect holding companies to avoid significant M&A activities that would jeopardize their leverage,” the report said.

If so, the biggest question is whether any local banks will be interested in acquiring part of Woori Financial Group, which the government intends to finish selling by the end of next year.

The Financial Services Commission last week announced details on the sale procedure for the nation’s biggest financial group by asset.

The financial regulator said it will divide Woori Financial Group into regional banks, brokerage units and Woori Bank.

In a report released last month, Fitch projected that while the sale of Kwangju Bank and Kyongnam Bank as well as its brokerage unit will go smoothly, the sale of Woori Bank may not be easy.

“The size of Woori Bank and the government’s intention not to sell it to a foreign buyer means a complete sell-down of the state’s stake will remain very challenging,” the report said. “Domestic purchasers of sufficient scale may lack the financial flexibility to make such an acquisition, especially with the toughest Basel III capital standards being phased in from December 2013.”

BY LEE HO-JEONG [ojlee82@joongang.co.kr]