As Middle East-Driven Insolvency Risks Rise, Banks Intensify Competition to Expand Shareholder Returns

KB, Shinhan, and Hana See Slight CET1 Drop Amid High Exchange Rates and Increased Corporate Lending
High Interest Rate Outlook Driven by Middle East Risks Raises Insolvency Pressure
Prudential Management Under Scrutiny... Need for Calibrated Expansion of Shareholder Returns

The common equity tier 1 (CET1) ratios of major financial holding companies showed a slight overall decline in the first quarter of this year. While financial holding companies are competitively ramping up shareholder returns in line with the government's value enhancement policies, the combination of heightened geopolitical risks from the Middle East and the potential for a prolonged high interest rate environment is increasing the importance of capital adequacy management. Although banks’ capital ratios remain at stable levels, there are concerns that, should the high interest rate phase last longer than expected, the pressure of insolvency could rapidly intensify, especially among vulnerable borrowers.

Competition Heats Up for Shareholder Returns Amid CET1 Decline Pressure

According to the financial sector on May 11, among the four major financial holding companies, KB Financial Group, Shinhan Financial Group, and Hana Financial Group all recorded a slight drop in their CET1 ratios compared to the end of last year in the first quarter of this year.

KB Financial Group’s CET1 ratio fell by 19 basis points (bp; 1bp = 0.01 percentage point), from 13.82% at the end of last year to 13.63% in the first quarter. Shinhan Financial Group’s ratio dropped by 16bp, from 13.35% to 13.19%, while Hana Financial Group’s ratio decreased by 29bp, from 13.38% to 13.09%.

In contrast, Woori Financial Group’s CET1 ratio rose by 70bp, from 12.9% to 13.6%. A representative from Woori Financial Group explained, “This reflects our ongoing efforts to improve capital efficiency through continuous asset rebalancing and the revaluation of tangible assets.”

CET1, the proportion of total capital raised through common stock, is a key soundness indicator that demonstrates a financial institution’s loss-absorbing capacity. Financial authorities have recommended that financial holding companies maintain a CET1 ratio of 13% or higher as part of the value enhancement policy push.

Recently, the pressure on CET1 ratios has mounted, primarily due to a rise in exchange rates and an increase in corporate lending. The increase in the won–dollar exchange rate has led to a higher level of risk-weighted assets (RWA) related to foreign currency assets, while the government’s drive to expand productive finance has also resulted in a rise in corporate loans. Since corporate loans carry higher risk weights (RW) than household loans, financial companies must accumulate more capital even for the same amount of lending.

Amid these conditions, financial holding companies are accelerating their efforts to increase shareholder returns. At the announcement of its first-quarter results, KB Financial Group decided to cancel all of its treasury shares, which amount to 3.8% of the total number of issued shares and are valued at approximately 2.3 trillion won based on the then-current share price. In addition, the group is pursuing an extra buyback and cancellation of treasury shares worth 600 billion won.

Shinhan Financial Group has removed the upper limit on its shareholder return ratio, switching to a performance-linked method based on return on equity (ROE) and growth rate. Hana Financial Group also plans to move up its timeline for achieving a 50% total shareholder return ratio from 2027 to this year. Woori Financial Group is expected to raise its total shareholder return ratio from 36.8% last year to the 40% range this year.

Geopolitical Risks in the Middle East Delay Rate Cuts... Growing Concern Over Bank Insolvency

The problem is that ongoing geopolitical risks in the Middle East, combined with the possibility that the US Federal Reserve may delay cutting its benchmark rate, could prolong the high interest rate environment beyond initial expectations. Persistent instability in the Middle East is keeping international oil and logistics costs elevated, reigniting inflationary pressures. This, in turn, is delaying the timing of US Federal Reserve rate cuts, and there is a high likelihood that Korea’s own policy rate cuts will also be limited. Ultimately, the geopolitical risks emanating from the Middle East are fueling instability in oil prices, inflation, and exchange rates, which is increasing the burden on domestic banks to maintain asset quality.

If high interest rates persist, delinquency risks are expected to rise, especially among self-employed individuals and small and medium-sized enterprises (SMEs). Already, key bank soundness indicators are deteriorating. As of the end of 2025, the four major commercial banks’ non-performing loan balances stood at 3.8468 trillion won, up 21% from the previous year. Delinquency rates are also on the rise. According to the Financial Supervisory Service, the delinquency rate on corporate loans at domestic banks climbed from 0.59% at the end of February 2024 to 0.68% at the end of February 2025, and further to 0.76% at the end of February this year.

In addition, the introduction of the “stress buffer capital” system, which financial authorities had been pursuing, has been postponed again, pushing soundness management—which had been expected to tighten—down the priority list somewhat. This system is a measure to assess banks’ loss-absorbing capacity and requires banks that do not meet the standards to build up additional capital.

Within and outside the financial sector, there is consensus on the need to expand shareholder returns in line with the value enhancement policy. However, there is also strong emphasis on the importance of balancing this with the need to bolster the capacity to absorb losses in preparation for external shocks. If insolvencies materialize, RWA can quickly increase, which in turn puts further downward pressure on CET1 ratios. To expand “productive finance,” banks must have sufficient capital strength, and calls are growing for financial authorities to strengthen their prudential management and supervision.

A financial authority official stated, “While the CET1 ratios of major financial holding companies currently remain at stable levels, external uncertainties such as the Middle East situation are increasing,” adding, “Banks must meticulously manage capital adequacy, maintaining a balance between bolstering loss-absorbing capacity and expanding shareholder returns.”

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