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Insolvency, Restructuring Feared to Undermine Banks’ Soundness
Vulnerable Bank Soundness
Insolvency, Restructuring Feared to Undermine Banks’ Soundness
  • By Michael Herh
  • February 18, 2016, 08:45
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Korean financial regulators and banks are implementing corporate restructuring, targeting 299 companies including 54 large companies with signs of insolvency.
Korean financial regulators and banks are implementing corporate restructuring, targeting 299 companies including 54 large companies with signs of insolvency.

 

Corporate restructuring was the main culprit behind a drop of 40 percent in Korean banks’ business performances last year. Financial regulators explained that bad account cost from the restructuring of shipbuilders such as STX Shipbuilding weakened banks’ profitability last year.

Last year, Korean banks posted 3.5 trillion won in net income, a drop of 42.6 percent from a year before. In particular, with the rehabilitation procedure of Kyeangnam Enterprises and the workouts of POSCO Plantec and Donga One as well as the losses of the shipbuilding industry affecting banks’ business results, banks’ bad account cost swelled to 11.7 trillion won, up 2.5 trillion won from a year before.

What’s the matter is that the massive restructuring of large companies in slumping industries will lead to drops in earnings of other connected large companies or many small and mid-sized partners this year.

According to financial regulators and the business circle, Doosan Group affiliates, LG International Corp., LS Networks, Hyundai Heavy Industries, and Samsung C&T among others suffered losses last year. In addition, a dominant view is that during a global economic slump, corporate earnings will slightly improve at best. Further, some experts even say that amid drops of income which banks earn by capitalizing on the gap between lending and deposit rates, domestic interest rates may further drop. Last year, banks’ interest income stood at 33.5 trillion won, a 1.4 trillion won drop year on year.

“Worries about bad debts of large companies will continue all the year round,” said a financial market researcher in Seoul. “I see the KB Financial Group’s additional reserve of 180 billion won for big shipping, steel and mechanical facility companies as a start.”

“Destabilizing factors are still latent due to sharp rises in household debts, slump in corporate business and the continuing restructuring of marginal firms,” said Korea Investors Service.

The Bank of Korea announced on February 15 that banks’ household debts added up to 641.3 trillion won, an increase of 2.2 trillion won from a year before and the biggest increase since 2008 when the Bank of Korea began to calculate them. Besides, some analysts say that banks will have more burdens as they have difficulty financing at a time when global asset regulations against banks are being tightened.  

Last year, financial regulators designated 299 companies including 54 large companies as companies with signs of insolvency. The government and banks are implementing restructuring based on corporate restructuring agreements. Going forward, they will expand their restructuring targets with a focus on marginal firms.