Basel III bonds’ success is good news for banksDebut Basel III-compliant bond sales by Korean lenders reflect improved confidence among regulators and investors in a banking industry that has shown signs of strain during past global crises.
Woori Bank, a unit of Woori Finance Holdings, Korea’s largest financial group, sold $1 billion worth of dollar-denominated 10-year tier-2 subordinated notes on April 24 yielding 207.5 basis points more than similar-maturity Treasuries. That’s just 27.5 basis points wider than for Australia and New Zealand Banking Group, rated three levels higher by Moody’s Investors Service.
Kweon Chang-woo, head of the Financial Supervisory Service’s bank prudential oversight team, said this shows other Korea banks can issue similar debt. “There seems to be a widespread feeling among global investors that Korea is in good hands, and, with its well-established risk management, that’s attracting more overseas investors,” he said.
Korea’s fastest economic growth in four years is helping to keep a lid on the costs of Basel III notes, which offer higher payments to compensate investors for the risk regulators will declare the borrower non-viable in a crisis. The banks, which face a record 8.4 trillion won ($8.2 billion) of maturing subordinated bonds this year, will increase offerings of the new securities in the next 18 months, according to an April 28 Fitch Ratings report.
“All things being equal, the chances of me as a creditor being hurt from Korean banks are much less,” said Swee Ching-lim, a Singapore-based credit analyst at Western Asset Management, which manages $468 billion. Korean regulators seem more “creditor friendly” in their handling of Basel III rules and the risk of failure is “pretty low” due to the part-state ownership of the nation’s lenders, he said.
Regulators in Korea forced banks to implement better risk controls following the Asian financial crisis in 1997-8 and the global financial crisis six years ago.
Korea’s government, which had to guarantee as much as $100 billion of banks’ foreign-currency debt during the 2008 crisis, is forcing lenders to boost non-won liquidity and improve capital adequacy in order to avoid a repeat. The country adopted more stringent rules from the Basel Committee on Banking Supervision from December to reduce the burden on taxpayers in the event of another emergency.
So-called Basel III bonds pay higher yields because the notes will be written off or converted to equity if the borrower’s balance sheet deteriorates to the point of non-viability.
The average total capital ratio of all 17 banks subject to Basel III was 14.55 percent at the end of 2013, according to the FSS. All the banks met their requirements, while Woori’s ratio was 15.52 percent, the FSS reported.
“Investors are taking a reasonably positive view of Korean credits given the country’s strong fundamentals and the gradually improving economic outlook,” said David Marshall, a Singapore-based analyst at CreditSights. “Issues from other banks should find a market among international investors because they’re generally in sounder financial condition.”
Average dollar-bond yields for Korean issuers touched 2.7364 percent on April 14, the least since May 2013, and were at 2.7797 percent May 6, JPMorgan Chase indexes show. That compares with an average investment-grade yield in Asia of 4.1863 percent. South Korea’s 10-year won government-bond yield slipped 5 basis points to 3.48 percent this month through yesterday.
Korea’s central bank last month raised its 2014 growth forecast to 4 percent from 3.8 percent projected in January and forecast a 4.2 percent expansion for next year. Gross domestic product grew 0.9 percent in the January-March period from the previous quarter.
Korea’s foreign currency reserves climbed to a record $355.85 billion at the end of April. Exports jumped 9 percent in April from a year earlier, beating estimates for a second straight month. The won has risen 2.6 percent against the dollar this year and yesterday touched 1,022.55, its strongest level since August 2008.
The nation’s housing market is also recovering, with apartment prices rising every month since October, according to data from Kookmin Bank in Seoul. Combined first-quarter preliminary net income at all 18 lenders for the first quarter rose 0.6 percent from a year ago to 1.9 trillion won, the FSS said in a May 1 statement.
“Investors are interested in Basel III tier-2 securities in this low interest-rate environment because they offer a higher yield than senior bonds,” said Lee Jeong Mook, the Seoul-based deputy general manager of Woori Bank’s treasury department. “Investors have confidence in Korea’s banking system because Korean authorities have taken preemptive action to failures.”
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