The Korea Development Bank (KDB) will sign a US$200 million (219 billion won) currency swap agreement with the Industrial and Commercial Bank of China (ICBC), the world’s largest commercial bank in terms of capital.
According to the KDB on December 10, chairman Lee Dong-geol plans to visit China this week and sign a memorandum of understanding (MOU) for the currency swap contract with the ICBC. The two banks are in talks to make it worth US$200 million (219 billion won) but nothing is confirmed yet. This will be the first currency swap agreement signed between a state policy bank and a state-run bank, not central banks of two countries.
The KDB is also planning to conclude another currency swap contracts with other Chinese banks. As the South Korean and the Chinese governments, which had conflicts over the deployment of the U.S. Terminal High-Altitude Air Defense (THAAD) missile system on the Korean peninsula, extended their currency swap agreement and held a summit, the bank is seeking to accelerate the advance into China.
When the two banks succeed in signing a currency swap agreement, they will be able to give a loan to companies of its partner countries in local currencies. South Korean small and mid-size companies that have had difficulties in taking out loans from Chinese banks unlike conglomerates, which conduct large-scale business in China such as Samsung Electronics and Hyundai Motor, are expected to get a loan in yuan more easily. Contrariwise, Chinese companies which entered the South Korean market can take out a loan in Korean won from the KDB. This is like an opening of credit lines.
In addition, the KDB is considering ways to encourage some Chinese banks entering the South Korean market, including the Bank of Communications, to participate in creditors when it manages a large syndicate loan. In this case, the KDB, on conversely, will also be able to be invited to a syndicate loan provided by Chinese banks.
The KDB is expanding its touch point with Chinese banks as part of its efforts to support South Korean banks advancing to China and seek for its new growth engine. A senior official from the KDB said, “The bank needs to improve profitability in order to smoothly respond to the demand of policy funds, including the fourth industrial revolution which is emphasized by the government. So, it is trying to find a new growth engine in China.” The KDB needs to make an additional 10 billion won (US$9.16 million) in its bid to lower the interest rate by 1 percent point when providing a 1 trillion won (US$915.75 million) loan to emerging companies or small and mid-size companies.
The worsening performance of five Chinese branches of the KDB is another factor. To improve the performance of its Chinese branches, the bank should run a lucrative business in China. According to the financial and profit and loss data of five KDB branches in China from Hong Il-pyo, lawmaker of the Liberty Korea Party, they recorded an operating loss of US$55.5 million (60.61 billion won) last year, which was more than 10 times higher than US$5.15 million (5.62 billion won) in 2015 last year. All its five branches showed a loss and the Beijing branch had the highest loss at US$19.42 million (21.21 billion won). The amount of deposits tumbled by a whopping 42.3 percent from US$350 million (382.2 billion won) in 2015 to US$203 million (221.68 billion won). The amount of liquid assets, such as cash and savings, also reduced as much as 41.5 percent from US$889 million (970.97 billion won) to US$520 million (567.84 billion won) over the same period.