Gov’t tightening helps banks reduce their risksKorean banks led declines in bond risk as Moody’s Investors Service praised regulators for tightening scrutiny of borrowers following chaebol failures.
Credit-default swap contracts insuring the debt of Export-Import Bank of Korea have fallen 19 basis points this quarter, followed by 16 basis points at Industrial Bank of Korea and 12 for Hana Bank, according to the Markit iTraxx Asia ex-Japan Investment Grade index. That compares with a 15 basis point increase for State Bank of India.
Korea’s Financial Services Commission announced plans last week to tighten rules on corporate debt disclosure after bankruptcy filings from business groups known as chaebols including Tongyang and Woongjin. The regulator lifted a ban this week on short selling of bank stocks in a sign of growing confidence in the lenders after it extended debt monitoring requirements.
“The FSC’s measures are good for creditor banks in terms of gaining more authority on monitoring companies with high credit risk,” said Lee Jong-myung, a credit analyst at Hanwha Investment & Securities. “It should help companies manage their debt more responsibly, either voluntarily or involuntarily, and provide guidelines for companies that may need restructuring so they can avoid default.”
Under the new measures, any business group whose borrowings from Korean financial institutions account for more than 0.075 percent of total lending nationally must meet certain conditions, according to the FSC. Previously, only companies that took more than 0.1 percent of all lending in the country had to meet the rules, which are meant to improve corporate finances for timely debt payment.
Business groups that rely more on bonds and commercial paper than loans will have to disclose total outstanding loans and debt, according to the FSC.
“The new measures aid banks’ monitoring of large conglomerates,” Park Hyun-hee, analyst at Moody’s, wrote in a Nov. 11 report.
Combined non-performing loans held by Korean banks totaled 25.8 trillion won ($24.2 billion) as of Sept. 30, or 1.8 percent of total outstanding credit, the highest level in more than two years, according to data from the Financial Supervisory Service, an execution arm of the FSC.
The FSS will ask lenders to set aside enough provisions as risks remain that banks’ bad debt may rise due to companies facing cyclical downturns, the regulator said in a Nov. 7 statement.
“The creditor banks may see possible losses from highly indebted companies hurt their income in the short term,” said Jeong Dae-ho, a credit analyst at KB Investment & Securities. “In the long run, it should be easier for the banks to manage credit risks from the business groups.”
Woori Bank, a unit of Korea’s biggest financial group by assets, posted the highest non-performing loan ratio of 2.99 percent as of September among the seven biggest nationwide lenders, according to FSS data. The combined third-quarter profit for the country’s banks dropped 23 percent from a year earlier to 1.8 trillion won, the FSS said on Nov. 4.
The new steps by the regulators “are credit positive for Korean banks because they will strengthen their ability to manage their exposure to large conglomerates at a time when sales growth and profitability have weakened,” according to Moody’s.
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