Ready for Restructuring

The Korea Development Bank (KDB) decided to record a coverage ratio of at least 100% for its allowance for bad debts.
The Korea Development Bank (KDB) decided to record a coverage ratio of at least 100% for its allowance for bad debts.

 

The Korea Development Bank (KDB) decided to record a coverage ratio of at least 100% at or before the end of this year with regard to its allowance for bad debts. This is to ensure capital adequacy ahead of restructuring of insolvent companies.

At the end of last year, the KDB fixed its coverage ratio target at the previous year’s level. As of the end of December 2015, the bank recorded a total credit of 128 trillion won, including 7.3269 trillion won in substandard credit, along with an allowance for bad debts of 5.7625 trillion won. The substandard credit coverage ratio was 78.65%, much lower than the banking sector average at 112%. The recent significant upward adjustment has to do with the South Korean financial authorities’ request for a coverage ratio of at least 100% with the restructuring of corporations in danger taking shape.

By simple calculation, the KDB has to prepare an allowance of at least 1.5 trillion won in order to raise the ratio to 100%. Still, the amount is predicted to snowball given that the bank has a large amount of receivables in the shipbuilding sector, a major restructuring target, along with the lack of allowances in it.

The KDB is the main creditor bank of Daewoo Shipbuilding & Marine Engineering (DSME) but its allowance concerning DSME was only 0.63% of its total credit to the shipbuilder at the end of 2015, 6.4853 trillion won vs. 40.9 billion won to be specific.

Besides, a huge amount of extra money is predicted to be required as the KDB has not classified its loans for major shipbuilders such as DSME as substandard loans. According to industry insiders, the bank has to prepare 1.2 trillion won to six trillion won with regard to DSME alone with its risk exposure to the company amounting to 6.3 trillion won or so. Furthermore, the bank’s capital adequacy can take a direct hit once similar restructuring processes are initiated in the sectors including shipping, steel and construction.

 

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