[ANALYST REPORT] Korean government's policy bank recapitalization plan is credit positive for banks

Below is an article from “Moody’s Credit Outlook”, 13 June, 2016 issue.


Last Wednesday, the Korean government announced plans to recapitalize public-policy banks Korea Development Bank (KDB, Aa2/Aa2 stable, ba2) and The Export-Import Bank of Korea (KEXIM, Aa2 stable), a credit positive for the banks. The plan clarifies the size and method of recapitalization, and maintains the government’s strong commitment to the banks. KDB and KEXIM’s Aa2 ratings benefit from nine notches of government support uplift.

The announcement includes these specific policy-bank-related measures:

-Capital injections to KDB and KEXIM will be earmarked in the government’s 2017 budget

-KEXIM will receive a KRW1 trillion capital injection by September 2016

-An KRW11 trillion recapitalization fund for policy banks will be set up with KRW10 trillion in loans from the Bank of Korea and KRW1 trillion in subordinated loans from Korea Asset Management Corporation (unrated). The policy banks can call the capital as needed. The fund will purchase future KDB and KEXIM hybrid capital securities issuance

KDB and KEXIM are major creditors to restructuring companies in the shipping and shipbuilding sectors, for which the system-wide ratio of nonperforming loans (NPL) was a high 11.4% for shipping and 12.0% for shipbuilding as of March 2016. Consequently, KEXIM’s NPL ratio rose 1.31 percentage points year on year to 3.35%, while its total capitalization declined 49 basis points to 9.9% as of March 2016. KDB’s NPL ratio rose an even more significant 4.04 percentage points to 6.7%, but because it is better capitalized than KEXIM, its total capitalization was 14.6% at March 2016.

The government’s plan addresses KEXIM’s current weak capitalization, and prepares for the policy banks’ potential increase in provision charges if the corporate sector restructuring fails to proceed as planned. 

Based on its own scenario analysis, the government estimates the two banks together may require KRW5- KRW8 trillion to maintain total capital ratios of 13% for KDB and 10.5% for KEXIM. A loss of KRW4 trillion is about 6% of KEXIM’s gross loans and 3% of KDB’s gross loans.

If there is a risk to financial sector stability, the government’s plan also calls for a direct capital injection from the Bank of Korea into KEXIM. In such an event, the government noted that it will eventually acquire BOK’s incremental stakes in KEXIM. As of June 2016, KEXIM’s largest shareholder was the government with 70.0% stake, followed by BOK at 12.4% and KDB at 17.6%. 

This provision gives the government an option to ensure timely support to KEXIM since the decision process at the BOK may be quicker compared to the government.

KDB and KEXIM continue to face significant asset quality risk stemming from ongoing corporate sector restructurings, and their provision charges may surge if some of the restructured companies are put under receivership. However, we expect the government’s continued strong and timely support, which underpins the banks’ debt rating.

By Sophia Lee, CFA, Vice President - Senior Credit Officer, Financial Institutions Group, Moody‘s Investors Service Hong Kong Ltd.

Source: Moody's https://www.moodys.com/