"Leverage Regulation" Capital Firms' Capital Expansion Progressing Smoothly... "Increase in Risk Assets is a Burden"

Most Leverage Ratio Regulations Likely Met... Concerns Over Increase in High-Yield and Risk Assets

[Asia Economy Reporter Yu Je-hoon] Capital expansion in the domestic capital industry to respond to the financial authorities' leverage ratio regulations is progressing smoothly.

According to the report titled ‘Review of Capital Adequacy of Capital Companies in Response to Strengthened Leverage Regulations’ recently published by Korea Ratings on the 17th, since the announcement of the financial authorities' liquidity enhancement measures for specialized credit finance companies last year, the total amount of capital increases and issuance of hybrid capital securities disclosed by capital companies up to the 10th of this month has been totaled at 2.312 trillion KRW (including planned amounts).

Looking at the scale of capital expansion by period, about 1.7 trillion KRW was accumulated last year, and about 600 billion KRW so far this year. This significantly exceeds the average capital expansion scale of about 600 billion KRW during 2018?2020, before the expansion of leverage regulations. The leverage ratio refers to the limit of total assets relative to equity capital and is an indicator of a financial company's soundness and stability. The financial authorities previously revised supervisory regulations in February last year to adjust the leverage ratio of capital companies to 9 times from this year and to 8 times from 2025 onward.

Korea Ratings expects that each capital company will be able to manage capital adequacy within regulatory levels based on this active capital expansion. All 32 capital companies with credit ratings from Korea Ratings met the leverage ratio standard of 9 times or less applied from this year, and only two companies exceeded the strengthened leverage ratio (8 times) to be applied from 2025.

The scale of capital expansion was larger among bank-affiliated capital companies. Bank-affiliated capital companies, based on their competitiveness in funding costs, operated a high-leverage business structure with an average leverage ratio of about 8.2 times as of the end of 2020. However, after undertaking large-scale capital expansion of 1.75 trillion KRW from last year to this month, the leverage ratio has since been reduced to 7.2 times.

Non-bank capital companies are also actively expanding capital, but as of this month, their cumulative amount stands at 562 billion KRW, showing a deepening gap in capital scale compared to bank-affiliated capital companies. Excluding Hyundai Capital and Commercial, the average capital size of non-bank capital companies as of the end of last year was about 500 billion KRW, which falls short of the bank-affiliated average of about 1.3 trillion KRW. Korea Ratings noted that while non-bank capital companies are also actively expanding capital and have relatively favorable leverage ratios compared to bank-affiliated companies, their additional support capacity and scale from affiliates are relatively insufficient, making rapid capital scale expansion difficult for the time being.

However, Korea Ratings' analysis suggests that despite this active capital expansion, the actual risk in the capital industry may increase. Although the reduction in leverage ratio enhances loss-absorbing capacity, the proportion of relatively stable auto finance is shrinking while high-yield, high-risk corporate and investment finance assets are increasing. The proportion of real estate project financing (PF) is also gradually expanding amid growing uncertainty in the real estate market, which is a negative factor. Korea Ratings stated, "If the proportion of high-risk assets expands while the capacity to increase operating assets is limited due to strengthened leverage regulations, the actual risk relative to the leverage indicator may increase."

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