Plummeting BIS Rates
The equity capital rates of major domestic financial institutions, according to the Bank for International Settlements (BIS), have dropped below 13% for the first time in a year. This is because risk-weighted assets have increased. The financial industry will begin inspecting BIS rates of major financial institutions with the start of the enforced capital regulation BASEL III in December. Some financial companies and banks are already working on expanding their capital.
According to the Financial Supervisory Service on September 9, the connected BIS rate of a bank holding company at the end of June dropped to 12.95%, which is 0.16% lower than last quarter’s 13.11%. This is the first time in 4 quarters (1 year) for the rate to have decreased and stayed below 13% for 2 consecutive quarters.
The situation was similar for banks. At the end of June, the domestic banks showed a BIS rate of 13.88%, which is 0.12% lower than last quarter’s. Risk-weighted assets increased in large portions, while equity capital did not increase much.
Some financial companies have gone into emergency BIS rate management. BIS rates of the NongHyup (10.58%) and Hana (10.85%) financial groups are nearing level 1 (BIS rate 10%) in the evaluation of bank holding companies.
Specifically, NH Financial Group dropped 0.83% compared to last quarter, due to the increase in unrecognized amounts of subordinated security bonds and the appropriation for irrecoverable nonperforming loans. The BIS rate drop of NH Bank to 0.77%, one of NH Financial Group’s main subsidiaries, was critical. The BIS rate of NH Bank marked 15.67% towards the end of 2011, but has been dropping consistently since then.
As the BIS rates of most financial institutions decrease, efforts to expand capital, starting with banks, are continuing. NH Bank will issue 500 billion won (US$460.5 million) of subordinated security bonds within September. It has been agreed with NH Financial Group to offer a 499.99998 billion won worth of recapitalization to shareholders. NH Bank is a 100% subsidiary of NH Financial Group.
An NH Bank associate said, “Additional subordinated security bonds and recapitalization have been decided to secure capital safety and soundness,” and added, “Once the capital is secure, the BIS rate will increase about 1%, bringing up the total rate to almost 15%.”
Woori Financial Group also decided to issue 500 billion won in subordinated security bonds in its executive board meeting last month. Korea Exchange Bank and Korea Development Bank are also planning the same. Hana Bank will issue 250 billion won (US$230 million) in subordinated security bonds.
On top of the capital rate dropping due to risk-weighted assets and increased offers for shareholders, BASEL III will be applied. Then it will be more difficult to have subordinated security bonds as capital due to strengthened standards and conditions. Therefore, financial institutions are trying to secure capital now.
A FSS representative said, “Recently, with bank holding companies and banks suffering worsened profitability, and considering the difficulty of improving equity capital rates due to the BASEL III application in December, we will try our best to encourage strict management of capital adequacy.”