2009 Outlook) S. Korean banks striving to rein in bad assets in 2009

( SEOUL, Dec. 31 (Yonhap) -- South Korean banks are expected to embrace another
tough year in 2009 as they struggle to beef up their capital base against
mounting bad debts, analysts say.

Local banks, led by Kookmin Bank, have enjoyed decent profits in the past few
years on record low borrowing costs and a booming economy.
But since mid-September when a global financial rout erupted, things abruptly
changed with their financial health deteriorating drastically.
"The biggest potential problem of the economy is how many bad assets they (banks)
have to book on their balance sheets," said Lee Han-deuk, an analyst at LG
Economic Research Institute. "They are now doubling efforts to raise their
capital bases and reduce bad debts, but it is unclear whether their moves provide
a great enough cushion."
Indeed, local banks are hastening efforts to bolster their capital adequacy
ratios as the slowing economy and a credit squeeze increase the number of bad
loans.
The average capital adequacy ratio -- a key measure of financial strength -- at
the nation's 18 lenders dropped to 10.79 percent at the end of September from
11.36 percent three months earlier.
Rising bad assets and losses in investment also helped reduce their profits.
Their combined profits reached 8.4 trillion won (US$6.58 billion) in the first
nine months of the year, a 36.2-percent drop from a year earlier.
"As the economy is widely expected to fall into a deeper than expected slump,
fueling rising bad debts, banks are under pressure to boost their
capital-adequacy ratios," said Im Il-sung, an analyst at Meritz Securities.
South Korean banks' loan-delinquency ratio rose to a three-year high in November
as more companies fell behind on payments in a slowing economy. The delinquency
ratio rose to 1.18 percent from 0.92 percent a year earlier, according to the
Financial Supervisory Service -- the nation's financial watchdog.
Local banks have raised around 16 trillion won so far this year by selling
subordinated bonds and shares. If their recapitalization moves go as planned,
their capital adequacy ratios would rise to 12.24 percent, according to the
watchdog. The banks also target to raise 3.1 trillion won additionally next year.
But the problem is that the banks would have to book more bad assets on their
balance sheets down the road as South Korea is geared up for the restructuring of
construction companies and small-sized shipbuilders.
"It (restructuring effort) is good for the banks at the moment," said Lee
Jun-jae, an analyst at Korea Investment & Securities Co. "But the sobering fact
is that they have to stand on their feet until things get better."
The worst global financial crisis since the Great Depression has dried up capital
markets, making it harder for builders to get loans. Some small-and-medium-sized
shipbuilders are also facing cash problems as the first contraction in global
trade in almost three decades slackens demand for new vessels.
"Should the economic slump last longer than expected, bad assets would mount,
which will further drive banks' capital ratios down," said Sung Byong-soo, an
analyst at Prudential Securities Co.
Last week, Lee Chol-hwi, chief executive officer of state-run Korea Asset
Management Corp. (KAMCO), estimated that local banks would have to book up to 70
trillion won in bad assets on their balance sheets next year.
Earlier this month, South Korea unveiled a set of measures to help the lenders
secure capital. The government said it would launch a 20-trillion won fund to
recapitalize banks, hoping that would encourage them to lend and help the economy
steer clear of a deeper slump.
The government also said it will help buy deteriorating loans that banks have
extended to finance real-estate projects. The total amount of project-financing
loans stands at 100 trillion won, half of which comes from commercial banks,
according to the watchdog.
"The government move will surely give lenders a cushion," said Mo Jae-sung, an
analyst at Hanwha Investment Trust Management Co. "Still, it is unclear whether
this will be enough because the banks' assets will further deteriorate," he said.
Regulators have demanded that banks raise their tier-1 capital ratio -- the core
measure of a bank's financial strength -- to 9 percent by January from 8.3
percent now.
Koo Kyong-hae, an analyst at HMC Investment & Securities Co., said should things
go as planned, banks will be able to maintain their tier-1 capital ratio of over
9 percent.
"But unexpected events and a greater than expected economic slump could make it
difficult for them to make it," he said.
Experts say should things go from bad to worse, bailout funds may be injected
into local banks, which forces them to seek mergers with rivals.
"Should they be equipped with sufficient capital, they would move to take over
rivals," said Lee Chang-wook, an analyst at Mirae Asset Securities. "After a
crisis, a few players will be able to survive."
sam@yna.co.kr
(END)