Hanshin Rating "'Embezzlement' at Gyeongnam Bank Limits Credit Rating Downgrade... Monitoring Needed for Internal Control Improvement"

Profitability and Capital Adequacy Indicators Declined
But Minimal Impact on Operations in Key Regions

Regarding the credit rating of Gyeongnam Bank, where an embezzlement incident amounting to 298.8 billion KRW occurred, opinions have emerged emphasizing the need for continuous monitoring of factors such as improvements in the internal control system, details of the litigation, and the impact of declining customer trust.

Kim Kyung-geun, Senior Researcher, and Wi Ji-won, Director at Korea Credit Rating, stated this in their report titled "Opinions on the Gyeongnam Bank Project Financing (PF) Loan Embezzlement Incident" on the 26th.

Korea Credit Rating assessed that the financial accident caused a decline in Gyeongnam Bank's profitability and capital adequacy indicators. They explained, "The financial loss amounts to 49 billion KRW, and 36 billion KRW was reflected as a net loss in the 2022 financial statements." According to management disclosures, the bank's net income at the end of last year decreased from the original 283 billion KRW to 247 billion KRW after accounting for the embezzlement incident. The Bank for International Settlements (BIS) ratio dropped from 15.5% to 15.4%. They further forecasted, "The decline in net interest margin (NIM) due to proactive funding measures taken in anticipation of the financial accident's aftermath will also negatively affect profitability."

However, they analyzed that the credit rating decline caused by the embezzlement incident is limited. They stated, "If a portion of the embezzled amount is recovered, the actual expected loss will decrease further," adding, "Considering this, the negative impact of this financial accident on the bank's credit rating is temporary." They also noted, "Given the high deposit loyalty in key regions such as Gyeongnam and Ulsan, and the borrower composition centered on small and medium-sized enterprises, the impact on the business base will not be significant." According to the Bank of Korea, Gyeongnam Bank's loan and deposit market shares in its key regions were 24.8% and 28.8%, respectively, as of June this year.

Korea Credit Rating stated, "Improving the establishment and operation level of the internal control system can prevent legal sanctions or financial losses due to ethical and compliance violations in the short term, and in the long term, it can enhance the bank's credibility and positively impact financial soundness and profitability through risk management."

The Financial Supervisory Service announced on the 20th that an embezzlement incident involving 298.8 billion KRW in loan funds and loan principal and interest repayment funds occurred at Gyeongnam Bank. The perpetrator, who had been in charge of PF loan operations in the Investment Finance Department for a long time, embezzled funds by forging loan documents and handling false loans transferred to accounts under acquaintances' names (loan fund embezzlement), and by transferring loan principal and interest repayment funds of PF loan borrowers to other accounts (loan principal and interest repayment fund embezzlement). The net embezzled amount (net loss) from the incident is 59.5 billion KRW.

On the 3rd of last month, a BNK Gyeongnam Bank branch in downtown Seoul. Photo by Jinhyung Kang aymsdream@

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