Banks Issue Record High Amount of Hybrid Capital Securities...All-Out Effort to Strengthen Capital

[Asia Economy Reporter Song Hwajeong] This year, the issuance of hybrid capital securities by financial holding companies and banks has reached an all-time high. This is due to the need to expand capital as capital ratios decline amid increased corporate loans.

According to NH Investment & Securities on the 13th, the cumulative issuance amount of hybrid capital securities by domestic financial holding companies and banks from the beginning of this year to August reached 6.4 trillion KRW, a 40% increase compared to 4.6 trillion KRW last year. It has already surpassed the previous largest issuance scale of 5.3 trillion KRW in 2020.

In just last month, Shinhan Financial Group issued 400 billion KRW, KB Financial Group 500 billion KRW, and Industrial Bank of Korea 600 billion KRW respectively. The five major financial holding companies and banks?KB Kookmin, Shinhan, Woori, Hana, and NongHyup?issued 2.331 trillion KRW in the first quarter and 1.653 trillion KRW in the second quarter this year. While issuance was mainly led by financial holding companies in the first quarter, banks have also started issuing since April, with monthly issuances continuing steadily.

The reason financial holding companies and banks are continuously issuing hybrid capital securities is the necessity to expand capital. This year, the Basel III (BIS) capital ratio of domestic banks has been on a continuous decline. According to the Financial Supervisory Service, as of the end of June, the total capital ratio based on BIS standards for domestic banks was 15.29%, down 0.23 percentage points from the end of March. It had also slightly decreased compared to the end of the previous year as of the end of March. The BIS capital ratio is a key indicator that measures the soundness of a bank’s financial structure by comparing capital to total assets (risk-weighted assets). Hybrid capital securities are recognized as capital when calculating the BIS capital ratio and are used as a means to defend capital ratios.

Another factor is the increased pressure from financial authorities to enhance soundness, such as provisioning requirements, amid rising interest rates, inflation, and growing global economic uncertainties. A Financial Supervisory Service official stated, "Due to recent rapid interest rate hikes, exchange rate increases, and expanded volatility in financial markets, as well as deteriorating domestic and international economic conditions, it is necessary to prepare for the possibility of unexpected losses expanding." The official added, "We will continue to encourage banks to strengthen their loss absorption capacity so that they can maintain soundness and faithfully perform their core function of financial intermediation despite domestic and international economic shocks."

The issuance of hybrid capital securities by financial holding companies and banks is expected to continue. Seongjong Choi, a researcher at NH Investment & Securities, explained, "Issuance of hybrid capital securities for improving capital adequacy, strengthening non-bank sectors, and refinancing purposes will continue. Considering the increase in risk-weighted assets, capital expansion must be continuously carried out, and capital expansion is also necessary to support the non-bank sectors of financial holding companies that heavily rely on banks."

However, the continuous rise in interest rates poses a burden. Han Joongsup, head of the bank analysis team at the Deposit Insurance Research Center, said, "In the second quarter of this year, the issuance interest rate of hybrid capital securities by the five major financial holding companies rose to 4.6%, up 1.5 percentage points from the average issuance rate of 3.1% last year." He added, "As a result, there is concern that the interest expense burden on hybrid capital securities for financial holding companies and banks will increase."

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