How Far Should You Apply to Large Corporations... Burdensome Financial Sector

Planned Support Scale Nears 6 Trillion Won
Government Guarantees Loss Compensation for Policy Banks
Only Encourages Participation from Commercial Banks
Concerns Over Simultaneous Deterioration of Soundness and Profitability

[Asia Economy Reporter Kangwook Cho] The financial sector is facing a dilemma over funding support for companies struggling with management difficulties due to the novel coronavirus infection (COVID-19). This is because, after receiving poor performance results in the first quarter, warning signs have been lit that the second quarter could lead to a performance shock. In particular, while policy banks such as KDB Industrial Bank have assured that the government will compensate for losses, commercial banks are only being encouraged to participate in support, increasing the burden of simultaneous deterioration in soundness and profitability.

According to the financial sector on the 29th, the amount of emergency funds provided or planned to be provided to large corporations by creditor groups including KDB Industrial Bank for the purpose of business normalization is estimated to be close to 6 trillion won. Including the additional 800 billion won to be supported within the day, a total of 2.4 trillion won has been injected into Doosan Heavy Industries, 1.7 trillion won into Asiana Airlines, and 1.2 trillion won into Korean Air. For low-cost carriers (LCCs), operating funds will be supported within the range of 300 billion won, and separately, about 170 billion won will be provided to Jeju Air as acquisition funds for Eastar Jet.

Support for Ssangyong Motor, which is facing a liquidity crisis, also remains. Recently, Financial Services Commission Chairman Eun Sung-soo mentioned the possibility of financial support based on Ssangyong Motor's efforts to normalize management, and it is expected that negotiations between the creditor group and Ssangyong Motor will proceed. The amount of Ssangyong Motor bonds held by KDB Industrial Bank, the main creditor bank, is about 190 billion won.

That is not all. 20 trillion won will be spent on investments in the Bond Market Stabilization Fund and Securities Market Stabilization Fund, corporate bond refinancing programs, rapid underwriting systems, and support for refinancing commercial paper (CP) and electronic short-term bonds, and a 40 trillion won scale period industry stabilization fund will also be established. Most of these are borne by policy banks, but the government, judging that it is difficult with national resources, is also requesting funding support from commercial banks. The five major financial holding companies are responsible for nearly 10 trillion won in the Bond Market Stabilization Fund and Securities Market Stabilization Fund proposed by the government. Most of this responsibility falls on banks. Initially, only about 30% of the pledged amount is paid, but given the current situation where concerns about deflation due to shocks to the real economy are increasing, there is a high possibility that the full investment commitment will have to be fulfilled.

In particular, there is a clear temperature difference between policy banks and commercial banks. This is because it is a large-scale investment with a high risk weight in a situation where maintaining capital soundness is already challenging. Although the government is easing soundness requirements, there is widespread concern that this burden could return in the future. In the case of policy banks, the government has pledged to compensate for losses if the Basel Committee on Banking Supervision (BIS) ratio falls. For commercial banks, regulations are being relaxed to increase funding supply capacity, but if a corporate bankruptcy situation occurs, it is questionable whether they can demand exemption from responsibility.

Commercial banks also hold bonds in Doosan Heavy Industries and Asiana Airlines, which have liquidity problems. While KDB Industrial Bank and Korea Eximbank are stepping in to support and encourage banks, banks' positions differ depending on their exposure (risk exposure), which is one of the reasons for this. During the 2016 restructuring of the shipbuilding and shipping industries, NongHyup Bank took a big bath by immediately recognizing losses on loans to Daewoo Shipbuilding & Marine Engineering and STX, resulting in a loss of 290.7 billion won in the first half of that year.

As of the end of last year, the corporate credit risk exposure of major commercial banks was approximately 148.06 trillion won for KB Kookmin Bank, 110.265 trillion won for Shinhan Bank, 91.977 trillion won for Woori Bank, and 85.847 trillion won for Hana Bank, an increase of about 10% compared to the previous year. More than half of this is credit extended to companies with credit ratings of BBB or lower, and this is likely to increase. The net income of the four major domestic financial groups in the first quarter decreased by 1.4% compared to the same period last year.

Experts expect that from the second quarter, when the economic shock caused by the COVID-19 crisis becomes full-fledged, the deterioration of financial sector performance will become a reality.

Researcher Jaewoo Kim of Samsung Securities said, "It is true that since the last global financial crisis, banks have reduced risks by expanding collateral and guarantees and reducing large loans to some risky industries," but added, "However, amid high concerns about the economic downturn related to COVID-19, it should be recognized that banks' provision reserves are not high."

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