Illusion of Improvement in Capital Adequacy of Banks

Industry's Total Capital Ratio Rose Late Last Year
But the Five Major Banks' Ratios Decreased
Capital Expansion Needed as Risk Assets Increase Due to COVID-19

[Asia Economy Reporter Park Sun-mi] Although the capital adequacy of domestic banks improved at the end of last year due to capital expansion and the introduction of the Basel III final framework, most of the top five domestic banks with high market share actually showed a decline in capital adequacy compared to the end of the third quarter of last year.

According to the "Bank BIS-based Capital Ratio Status" announced by the Financial Supervisory Service on the 18th, as of the end of 2020, the total capital ratio based on the Bank for International Settlements (BIS) standards for domestic banks (financial holding companies and banks) recorded 15.00%, up 0.41 percentage points from the previous quarter and 1.08 percentage points from the previous year-end. Even when isolating the 19 banks excluding the 8 financial holding companies, the total capital ratio at the end of last year was 16.54%, an increase of 0.51 percentage points from 16.03% at the end of the previous quarter.

However, most of the top five banks with high domestic deposit and loan market share showed opposite results. Among the top five banks, Kookmin Bank was the only one to improve its capital adequacy. Shinhan Bank’s total capital ratio fell by 0.24 percentage points from the previous quarter to 18.47%. Although risk-weighted assets increased due to loan growth, the current total capital ratio level was deemed adequate, so the bank did not significantly increase its capital.

Hana, Woori, and NongHyup Banks also saw their total capital ratios decline by 0.64, 0.55, and 0.42 percentage points respectively to 14.73%, 17.20%, and 17.70% at the end of the fourth quarter of last year, partly due to capital reductions from dividends. Only Kookmin Bank improved by 0.57 percentage points from the previous quarter to 17.78%. Not only the total capital ratio but other capital adequacy indicators such as common equity tier 1 ratio, tier 1 capital ratio, and simple tier 1 capital ratio also showed declines for the top five banks except for Kookmin Bank.

Only Kookmin Bank Improved... Active Capital Expansion through Subordinated Bond Issuance

A Kookmin Bank official explained, "Since last year, we have actively issued subordinated bonds, which has led to capital expansion and improved capital adequacy." Kookmin Bank increased its capital by nearly 2 trillion KRW through four subordinated bond issuances last year and continued the capital expansion momentum by issuing subordinated bonds worth 500 billion KRW last month.

The BIS total capital ratio represents the ratio of a bank’s total capital to its risk-weighted assets, with a higher number indicating better capital adequacy. Currently, the regulatory ratios for banks are 10.5% for total capital ratio, 7.0% for common equity tier 1 ratio, 8.5% for tier 1 capital ratio, and 3.0% for simple tier 1 capital ratio. Although the capital adequacy of the top five banks exceeds regulatory requirements and remains stable, the decline in capital adequacy amid an environment where risk-weighted assets inevitably increase due to the COVID-19 situation means that effective capital management accompanied by capital expansion may be necessary going forward.

In particular, the reason why the overall banking sector appeared to improve while major commercial banks’ capital adequacy declined is largely due to a massive capital increase of about 1 trillion KRW by the internet-only bank KakaoBank in the fourth quarter of last year, which caused its total capital ratio to surge from 13.45% to 20.03% by year-end. Additionally, the adoption of the Basel III final framework by policy banks such as the Korea Development Bank and Industrial Bank of Korea led to a 30.9 trillion KRW reduction in the overall banking sector’s risk-weighted assets.

A Financial Supervisory Service official stated, "We plan to induce effective capital management so that domestic banks can secure sufficient loss-absorbing capacity and maintain their funding functions."

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