"Strengthen Overseas Subsidiary Risk Management," Financial Supervisory Service Issues 'Warning' to Woori and Industrial Banks (Comprehensive)

Strengthening Soundness Management After Overseas Subsidiary On-Site Inspections
Banks Enhance Monitoring of Overseas Assets Amid Slow Global Economic Recovery and Growing Potential Risks

[Asia Economy Reporter Haeyoung Kwon] Financial authorities have ordered Woori Bank and KDB Industrial Bank to manage the soundness of their overseas assets. Amid ongoing global economic instability and rising concerns over the deterioration of overseas assets in the banking sector, they emphasized meticulous risk management by pointing out the credit quality of overseas subsidiaries' loan assets and foreign exchange risks.

According to the financial sector on the 21st, the Financial Supervisory Service (FSS) issued a management cautionary measure to Woori Bank's local subsidiary in Russia following a management evaluation conducted in the second half of last year.

They criticized the aggressive credit policies that increased loan assets but also raised concerns about potential defaults. Woori Bank's Russian subsidiary's loan receivables grew from 54.6 billion KRW at the end of 2018 to 84.5 billion KRW as of the third quarter of last year. Although the absolute scale is not large, the proportion of speculative-grade borrowers with credit ratings of 'BB+' or below accounted for double digits among the total loan assets.

Furthermore, it was found that the subsidiary neither operated its own credit supervision organization nor established internal regulations. For this reason, the domestic bank's credit supervision department is also handling credit supervision tasks for the Russian loans.

An FSS official stated, "Woori Bank mainly operates with Hyundai Motor and its partners in Russia, and while guarantees are provided at the headquarters level, the high proportion of non-investment grade assets is problematic," adding, "We ordered them to strengthen internal procedures to perform credit supervision functions at the domestic level and to separate and secure the independence of the bad debt write-off review from the credit review department."

The FSS also conveyed concerns about capital soundness to KDB Industrial Bank's local subsidiary in Uzbekistan. The Uzbek subsidiary of KDB Industrial Bank is experiencing deteriorating profitability, asset reduction, and a declining trend in the capital adequacy ratio, a key soundness indicator. The FSS demanded the establishment of management strategies to improve capital adequacy, including setting up a revenue model, capital expansion, and creating a stable funding structure.

They particularly pointed out the need for proactive measures against foreign exchange risks due to the depreciation of the local currency. The FSS said, "With the Uzbek government's foreign exchange liberalization measures, increased reserve requirements, and the possibility of further hidden currency devaluation, there are concerns about continued deterioration of the business environment. Strategies to overcome adverse conditions and strengthen capital adequacy must be established."

Additionally, they advised that internal regulations be flexibly revised in response to regulatory changes by local supervisory authorities, and that the pre-consultation process with the domestic headquarters be reasonably improved to allow for agile responses.

The FSS conducts on-site inspections of some banks' overseas subsidiaries annually. This time, it is noteworthy that they pinpointed concerns about overseas loan asset deterioration and foreign exchange risks, which commercial banks are worried about amid the delayed global economic recovery. Although the US-China Phase One trade agreement has been finalized, avoiding the worst-case scenario, geopolitical risks from US-Iran conflicts and tariff disputes between the US and major trading partners remain. There are also concerns about a hard landing in the Chinese economy, which has entered a 6% annual growth era. For example, Hana Bank's Chinese subsidiary saw its net profit in the first half of last year drop to 14.436 billion KRW, down to one-third compared to 44.759 billion KRW a year earlier.

A representative from a commercial bank said, "The global economic recovery is slow, and potential risks are increasing, so we are strengthening overall monitoring of overseas subsidiaries," adding, "Especially as overseas assets increase with expanded overseas operations, we plan to focus on soundness management by carefully identifying factors of deterioration and foreign exchange risks."

This content was produced with the assistance of AI translation services.