Uncertainties hit financial firms

The National Credit Union Federation of Korea has been in a panic since the beginning of this year, when the Hong Kong stock market began to tumble. This is largely because 60 percent of the credit union’s investments, or 365 billion won ($303 million), are tied up in equity-linked securities based on the Hang Seng China Enterprise Index (HSCEI).

The credit union is expecting its net profits to shrink 70 billion won due to losses on the Hong Kong market.

The HSCEI is an index that tracks the performance of companies based in mainland China listed on the Hong Kong stock exchange, commonly referred to as H shares.

This index, which started the year at 9,311.18, has since fallen below 8,000.

“If the index reaches 85 percent of the level at which the investments were first made before the ELS reaches its maturity, which is in 2018, we will be able to guarantee principal investment,” said an official at the national credit union federation.

However, recovery prospects for both the Shanghai and Hong Kong markets seem bleak.

The Korean credit union isn’t the only financial institution worried about uncertainties at home and abroad, which include significant falls in the Chinese markets and some Korean companies becoming unable to payback corporate loans due to disappointing earnings.

Such risks are even threatening the soundness of Korean banks.

According to the Financial Supervisory Service, the Bank for International Settlements (BIS) capital adequacy ratio of Korean banks has fallen from 14.09 percent in the second quarter last year to 13.99 percent three months later. The FSS expects the ratio have further declined in the fourth quarter.

“It’s because bank loans have grown in the second half of the year, whereas banks’ net profits have been shrinking, all while the Korean won has fallen in value against the U.S. dollar [which affects loans that are borrowed on foreign currencies],” said Park Sang-won, who heads the bank supervision department tat the FSS.

Compounding the problem, Korean banks are already facing compliance with the stricter Basel III by 2018. Under the so-called third Basel accord, which is designed to strengthen the regulation and risk management of the banking sector, Korean banks will have to raise their minimum BIS capital adequacy ratio limit from the current 9 percent to 13 percent.

The BIS ratio of the National Credit Union Federation of Korea in the third quarter fell 1.41 percentage points from the previous quarter to 8.16 percent.

The credit union is exempted from the Basel III requirements related to the BIS ratio largely because its businesses are centered on the domestic market. But since most of its clients are in lower income brackets, market experts say managing its soundness is as important as managing that of commercial banks.

BNK Financial Group, the holding company of Busan Bank and Kyongnam Bank, has recently been taking steps to improve its risk management.

In November, the group raised 742 billion won through stock issuance. By raising its capital, it was hoping to raise its BIS ratio, which was at 11.59 percent as of November, to its long-term target of 13 percent.

But as the Chinese market showed signs of instability coupled with the interest hike by the U.S. central bank in December, BNK Financial Group shares have tumbled by more than 30 percent in less than two months. As a result, it was only able to raise 64 percent of its target 742 billion won, or 475 billion won.

The result was a meager 0.72 percentage point improvement to the group’s BIS ratio.

“Maintaining solid soundness has become the key task for the banks,” said Seo Jeong-ho, a senior researcher at Korea Institute of Finance. “Banks should take more time to improve risk managements rather than focusing on short term goals like competing fiercely in increasing loan services.”

BY LEE TAE-KYUNG [kim.youngnam@joongang.co.kr]