Financial Authorities: "Daegu Bank Shows No Signs of Deteriorating Soundness... Consumer Welfare Increases"

"Decrease in Daegu·Gyeongbuk Loan-to-Value Ratio but Expansion in Supply Scale"

Daegu Bank, a regional bank in the Daegu-Gyeongbuk area, is transitioning into a nationwide commercial bank. This marks the birth of a new commercial bank 32 years after the approval of Peace Bank in 1992. It will be the seventh commercial bank following Shinhan, Woori, Hana, Korea Citi, KB Kookmin, and SC First Bank. Financial authorities stated that there is little concern about the deterioration of Daegu Bank's soundness and expect increased consumer welfare through enhanced competition.

Below is a Q&A from the Financial Services Commission regarding the 'Approval Decision for Daegu Bank's Transition to a Commercial Bank.'

- What is the reason for promoting Daegu Bank's transition to a commercial bank?

▲ The government announced last year that it would promote the transition of regional banks to commercial banks to stimulate competition in the banking sector by introducing new players. This involves entities with banking experience expanding their business scope and scale, which is expected to enable stable and effective competition promotion in a short period. Daegu Bank is believed to be pursuing the transition because it recognizes growth limitations under its current regionally restricted operations. By breaking free from regional business area restrictions, it plans to expand operations to the Seoul metropolitan area and regions without regional banks such as Chungcheong and Gangwon, where many customers are distributed. It aims to establish differentiated strategies leveraging the strengths of regional banks, such as relationship banking, to settle as a commercial bank.

- Are there any changes in legal regulations when transitioning to a commercial bank? Why were all requirements reviewed instead of only the relevant ones?

▲ The only legal differences between regional banks and commercial banks are the non-financial major shareholder stock ownership limit (15% → prohibition of exceeding 4%) and minimum capital requirements (KRW 25 billion → KRW 100 billion). However, since the transition of a regional bank to a commercial bank involves significant changes, it was deemed necessary to review all detailed legal examination requirements. Especially considering the expanded business scope compared to before, detailed management-related examination requirements such as business plans and internal controls were scrutinized more thoroughly. All necessary procedures, including external evaluation committees and stakeholder consultations, were conducted without omission to verify the validity of the examination requirements.

- What changes will occur when Daegu Bank transitions to a commercial bank?

▲ The business area will expand nationwide. Currently, Daegu Bank operates only in the Seoul metropolitan and Gyeongsang regions. The burden of raising funds at higher interest rates compared to commercial banks is also expected to ease. As competition among banks is expected to be stimulated around the new business areas, an increase in consumer welfare is anticipated.

Daegu Bank plans to open 14 new branches over the next three years in the Seoul metropolitan area, Chungcheong, and Gangwon. This is expected to improve financial accessibility for consumers in those regions. Additionally, Daegu Bank will expand funding supply to medium-credit small and medium-sized enterprises (SMEs). By enhancing profit-generating capabilities through operations in the Seoul metropolitan area and other regions, it plans to continuously strive to revitalize the regional economy by expanding funding supply to companies in the Daegu-Gyeongbuk area. It also plans to reduce costs by actively utilizing its own non-face-to-face channels and external platforms to offer various low-interest products to consumers.

- Will overall funding supply decrease, such as loan reductions to companies in the Daegu-Gyeongbuk hub area?

▲ After transitioning to a commercial bank, Daegu Bank plans to enhance its profit-generating ability through operations in the Seoul metropolitan area and use these resources to supply funds to local companies, thereby contributing to regional economic revitalization. While the proportion of loans in the Daegu-Gyeongbuk area may decrease as operations expand to other regions such as the Seoul metropolitan area, the total loan supply volume in the Daegu-Gyeongbuk area will continue to expand.

- Recently, Daegu Bank's delinquency rate has risen and capital ratios have declined. Is there concern about deterioration in soundness?

▲ Considering Daegu Bank's current capital adequacy level and capital expansion plans, concerns about deterioration in soundness appear minimal. It has sufficient surplus capital above regulatory capital adequacy ratios. After transitioning to a commercial bank, it is understood that DGB Financial Group will raise KRW 700 billion in capital over five years through capital increases. Specifically, funds will be raised through issuing KRW 400 billion in hybrid capital securities, KRW 200 billion in corporate bonds, and retained earnings.

Daegu Bank plans to gradually expand asset size while managing asset soundness such as delinquency rates. It will strengthen credit screening and post-management by enhancing head office control functions through credit rating model advancement and corporate loan automatic screening systems.

- Does Daegu Bank have an internal control system that meets commercial bank standards?

▲ Daegu Bank has implemented various measures to strengthen its internal control system and is evaluated to have established the internal control foundation necessary for operating as a commercial bank. For example, it has enhanced customer notifications by sending alert messages when opening securities account-linked deposits, added identity verification and account password input steps, and expanded branch audits, preparing tailored responses based on recent financial accident types. It has implemented 19 out of 21 tasks from domestic banks' internal control innovation plans and improved internal control systems including strengthening compliance officer capabilities. DGB Financial Group is also working to ensure that institutional improvements function effectively and that internal control becomes part of the organizational culture. Accordingly, the external evaluation committee composed of private experts positively evaluated Daegu Bank's governance and internal control improvements during the approval review.

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