Despite Strengthened Risk Management... Financial Conglomerates' Capital Adequacy Deteriorates

Increased Internal Transactions Raise Risk of Contagion
All 6 Companies Including Samsung and Hyundai Motor Decline

[Asia Economy Reporter Oh Hyung-gil] Although risk management for financial conglomerates such as Samsung and Hyundai Motor has been legally strengthened, their capital adequacy has been continuously deteriorating. In particular, some groups have increased internal transactions, raising concerns about the risk of contagion of insolvency among affiliates.

According to disclosures from financial conglomerates on the 6th, all six financial conglomerates?Samsung, Hyundai Motor, Hanwha, Kyobo, Mirae Asset, and DB?saw their capital adequacy ratios decline in the first quarter compared to the end of last year.

The capital adequacy ratio is a standard to ensure financial soundness. The loss absorption capacity considering capital duplication (consolidated equity capital) must be maintained above the minimum capital requirement considering additional risks at the group level (consolidated required capital).

Especially, from next year, when 'risk-weighted capital' is reflected in the consolidated required capital, this figure is expected to decrease further. Each group plans to calculate the capital adequacy ratio reflecting risk-weighted capital in the first half of next year based on this year's performance.

By group, Samsung's capital adequacy ratio was the highest among financial groups at 301.5% in the first quarter, but it fell by 16.9 percentage points from 318.4% at the end of last year. Kyobo, which recorded the highest capital adequacy ratio (321.4%) at the end of last year, dropped sharply by 41.1 percentage points to 280.3% in the first quarter.

During the same period, Hanwha also decreased by 32.8 percentage points from 234.1% to 201.3%, while DB and Hyundai Motor recorded 194.2% and 274.2%, down by 11.1 and 0.9 percentage points respectively.

Among the six financial groups, Mirae Asset had the lowest capital adequacy ratio at 157.5%, influenced by an increase of about 700 billion KRW in duplicated capital. In particular, Mirae Asset's capital adequacy ratio has been declining every quarter since 165.9% in the first quarter of last year, becoming the first among financial groups to fall into the 150% range.

According to the 'Act on the Supervision of Financial Conglomerates' enacted on the 30th of last month, if the capital adequacy ratio falls below 100%, a management improvement plan to enhance financial soundness must be submitted to financial authorities. Although Mirae Asset still has some margin compared to regulatory standards, given the ongoing decline, more meticulous capital management is required.

Internal transactions among these groups have also continued to increase. In the first quarter, internal transactions among the six major groups amounted to 27.9 trillion KRW, exceeding last year's same period of 22.8 trillion KRW by more than 5 trillion KRW. Samsung's internal transactions increased by 38.2% year-on-year to 13.2 trillion KRW. Kyobo also surged by 47.4% from 4 trillion KRW to 6 trillion KRW. Interconnectedness such as internal transactions accounts for 50% of the risk-weighted capital evaluation, raising concerns that it will ultimately lower the capital adequacy ratio.

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