Hana Financial Group Plans to Issue 270 Billion Won 'CoCo Bonds'... Preparing for April Refinancing

Hana Financial Group is set to issue 270 billion KRW worth of contingent convertible bonds (CoCo bonds). This move aims to defend against the maturity of the CoCo bond call option (early redemption option) and the decline in the Bank for International Settlements (BIS) capital adequacy ratio caused by reduced profits. Hana Financial reported a roughly 3% decrease in consolidated profits last year due to increased project financing (PF) provisions by its affiliated financial companies and valuation losses related to commercial real estate.

On the 26th, when the prosecution investigating former People Power Party lawmaker Kwak Sang-do's '5 billion won bribery suspicion' conducted a search and seizure at Hana Financial Group, the headquarters of Hana Bank in Jung-gu, Seoul. Photo by Kang Jin-hyung aymsdream@

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According to the investment banking (IB) industry on the 7th, Hana Financial recently formed a syndicate of securities firms as underwriters to issue CoCo bonds worth 270 billion KRW. CoCo bonds are recognized as capital in accounting terms, similar to hybrid capital securities (perpetual bonds), but if designated as a distressed financial institution by financial authorities, they are either written off or converted into shares. The maturity is over 30 years, making them perpetual, and typically, the issuer can exercise the call option to redeem principal and interest after five years. Whether to exercise the call option is at the issuer's discretion, but if not exercised, the issuer must pay penalty interest in addition to the existing rate.

The reason for issuing such bonds is to improve the BIS ratio. The BIS ratio is a capital adequacy ratio that numerically represents the proportion of capital to total risk-weighted assets (RWA) held by a financial company. Capital includes common equity capital, which combines stock issuance and retained earnings, other core capital (CoCo bonds), and supplementary capital (hybrid capital securities and subordinated bonds). Additionally, a 265 billion KRW CoCo bond call option maturity is pending in April.

There is also a need to defend the BIS ratio due to PF provisions and losses from overseas commercial real estate. Hana Financial Group announced in its recent earnings report that its consolidated net income for affiliated financial companies last year was 3.4516 trillion KRW, down 319 billion KRW (3.3%) from 2022. It explained that profitability slightly deteriorated due to valuation losses related to IB assets such as overseas investments. Hana Financial set aside a large provision of 370.9 billion KRW last year. Including this, the total provision amount increased by 499.8 billion KRW (41.1%) to 1.7148 trillion KRW compared to the end of 2022.

Hana Financial Group recently decided at its board meeting to pay a year-end cash dividend of 1,600 KRW per share to enhance shareholder value. The cash dividend per common share was set at 3,400 KRW, including three quarterly dividends of 1,800 KRW, an increase of 50 KRW compared to 2022. The annual dividend payout ratio rose by 1.0 percentage point to 28.4% compared to 2022. Considering the 150 billion KRW share buyback and cancellation conducted early last year, the total shareholder return ratio for the fiscal year reached 32.7%. Simultaneously, to resolve undervaluation of the stock price and continuously increase shareholder value, the group resolved to buy back and cancel 300 billion KRW worth of treasury shares within the year.

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Previously, Shinhan Financial Group issued 400 billion KRW worth of CoCo bonds due to provision burdens at affiliated financial companies. BNK Financial Group is also planning to issue 200 billion KRW worth of CoCo bonds. Initially, the board decided to issue 500 billion KRW in the first half of the year, but in February this year, reflecting interest rates and market conditions, only 200 billion KRW was issued.

An IB industry official said, "Financial holding companies face the maturity of CoCo bond call options issued five years ago, and with investment losses worsening profitability, refinancing of maturing CoCo bonds is necessary. CoCo bond issuance will continue to secure sufficient capital to prepare for PF provisions and losses from real estate alternative investments."

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