‘Korean banks may step up issuance of capital securities’

Tighter banking supervision rules and the phase-in of higher capital requirements in South Korea will likely increase the focus on bank capital and profit reserve buffers to meet coupon payments for newly issued Additional Tier-1 (AT1) securities, Fitch Ratings says. Banking groups are likely to step up the issuance of bank capital securities as they seek to meet the higher capital requirements, which will be fully phasedin by 2019.

Fitch Ratings says the amended rules relate to the flexibility the banking groups have to pay coupons on AT1 securities when capital ratios are close to or have fallen into the additional capital buffer zone. From an accounting perspective, the pool of available reserves from which distributions can be paid is now limited to a certain percentage of the bank's "annual profit", depending on regulatory capital ratios.

Previously this was based on a much larger distributable reserve pool classified as "retained earnings". The change was effective 22 December 2015 and does not apply to AT1 securities issued before that date.

This means that the issuing banks will have reduced flexibility to pay coupons when a breach of the capital buffer requirements is imminent. The requirement will also impact the banks' flexibility to pay ordinary dividends and performancelinked bonuses. The restrictions on distributions will be lifted once the bank's capital ratios exceed the buffer requirements. This change is designed to avoid a scenario where a bank with large retained earnings continues to make distributions on loss-absorbing capital, such as equities and AT1 securities, even though its capital adequacy continues to weaken. Higher capital requirements are being progressively phased-in with the regulator likely to announce the level of countercyclical buffer shortly.