South Korea’s financial regulator said banks shouldn’t repay money they received from a 20 trillion won ($16 billion) state-backed fund until there is no longer a risk of a collapse in investor confidence.
Repayments may fuel concerns among overseas investors about the banks’ capital ratios, said Rhee Chang Yong, vice chair of the Financial Services Commission. The fund, backed by the central bank, bought hybrid bonds from lenders in March, bolstering their so-called Tier 1 ratios, he said.
“We have concerns as a regulator: what is the implication of this kind of renegotiation to foreign investors?” Rhee, 49, said in an interview yesterday in Seoul. “It’s much better to maintain this debt as it is.”
US banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc. have repaid bailout money to the Treasury as they seek to shed restrictions on how they operate and compensate executives. Unlike in the US and Europe, South Korea’s government didn’t take equity stakes in banks and hasn’t imposed any constraints on how they do business.
The Troubled Asset Relief Programme “is a helping mechanism for troubled banks,” Rhee said. “It’s a totally different thing. This recap fund is a mechanism to safeguard our banks, which have no problems at this moment.”
A 54-stock financial index gained 1.8 percent as of 12:40 p.m. in Seoul trading, outperforming the benchmark Kospi index’s 0.1 percent decline.
Kookmin Bank, Woori Bank and Hana Bank are among eight financial companies that raised 4 trillion won from the fund, set up amid concerns that South Korean lenders would struggle to refinance overseas debt. Since then, the funding crunch has eased and banks can refinance in public markets at cheaper rates than the cost of the bonds it sold to the recapitalisation fund.
Spokespeople at the three banks declined to comment.
The bonds sold to the state-backed fund carry an annual coupon of about 6.5 percent, with small variations between banks. The yield on Kookmin Bank’s 300 billion won of 7.69 percent notes due 2013 fell to 5.48 percent yesterday from 5.95 percent on March 2, according to data compiled by Bloomberg.
Banks have the option to repurchase the 30-year securities after five years. Some lenders have complained about the cost of the bonds, said Kim Jae Woo, a banking analyst at Samsung Securities Co.
“Banks are now questioning whether they needed this money at all in the first place,” said Kim, without naming any lenders.
Kookmin Bank, South Korea’s largest, boosted its Tier 1 capital ratio — a measure of a lender’s ability to absorb losses — to 10.3 percent at the end of March from 9.9 percent three months earlier. Woori Bank’s ratio rose to 8.7 percent from 7.7 percent.
Hybrid bonds combine elements of equity and debt and allow borrowers to skip payments without defaulting.
Emboldened by a 30 percent surge in the benchmark stock index since March 1, some banks are turning to equity investors for funds. Shinhan Financial Group Co., the country’s second- biggest financial company by market value, raised 1.3 trillion won in March. KB Financial Group Inc., owner of Kookmin Bank, plans to sell as much as $2 billion of stock to existing shareholders.
While renegotiating the terms of debts is possible “in principle,” lenders would have to bear the cost of changing their contracts, just like they would on deals with private investors, Rhee said.
‘Pay The Price’
“It’s a contract with the government,” Rhee said. “If they made these contracts with private investors and if they want to renegotiate, probably they would have to pay the price.”
Rhee also said profits at South Korean banks probably “bottomed out” in the second quarter and are poised to recover, echoing comments made by KB Financial Chair Hwang Young Key in a June 17 interview.
Net income at the nation’s 18 banks dropped 75 percent in the first quarter on tighter lending margins and higher loan- loss provisions, according to the financial regulator. KB Financial reported a 62 percent drop in profit in the first three months of the year.