KB faces scrutiny of overseas business
The Financial Supervisory Service (FSS) said Wednesday it will examine the soundness of domestic banking groups’ overseas branches.
Risks associated with high levels of credit growth appear manageable, thanks to enhancements of risk-aversion regulations; but high credit leverage and increased short-term lending remain concerns.
“The FSS is a little worried about the asset quality of the banks’ overseas branches as market risks vary. Among emerging markets in Southeast Asia, Vietnam and Indonesia have high private-sector credit and GDP levels. KB Kookmin is the FSS’s primary target, but the inspection will be expanded to other banks,” said an official.
He said the FSS will ask the headquarters of the banking groups to submit documents detailing its overseas operations focusing on credit growth.
“If necessary, the FSS will conduct onsite checks because our internal analysis has shown Korean banks rely heavily on credit and short-term borrowing for external growth in their target markets. This is not a good strategy,” said the official, adding the average loan growth rate was double that of assets growth.
“The FSS found a couple of other banks were highly exposed to capital at risk in their short-term lending to corporate and retail clients, in the region.”
As of last year, Korean banks had a combined 185 overseas branches, according to FSS data. Most of them were in Southeast Asia, where lead- ing Korean manufacturers have larger operations.
KB Kookmin saw a whopping 45 percent increase in loans year-on-year at its overseas branches.
“The FSS is assessing whether the banks intentionally inflated their figures by increasing the amount of corporate and/or consumer short-term lending despite weak demand,” said another official.
Rises in local interest rates are likely to damage asset quality. More vulnerable countries, along with Indonesia, the Philippines and Vietnam, are being included because they have high levels of private-sector leverage and weaker corporate repayment ability.
“With rising household debt in Korea, banks’ asset quality could be damaged in countries with high dollar external debt or where businesses could be hurt by sharp for- eign-exchange movements, such as Indonesia and Vietnam, when the Fed hikes rates,” said Fitch Ratings.
Banking systems in developing countries have averted liquidity risks through lending to corporations to finance longer-term investment, but a high exposure to short-term lending may produce maturity mismatches.
Korean banks are betting on Southeast Asia attracted by the region’s high growth potential and the number of Korean manufacturers there.
“We see lots of new business opportunities in the region. A rise of short-term lending is highly unlikely to affect the overall creditworthiness of KEB-Hana given our tough assessment policy,” said a KEB-Hana official, adding its funding and liquidity were stable.