S. Korea's State Banks May Need Funds for Shipyards

Headquarters of South Korea's central bank (file photo)

By MarEx 2016-04-28 20:37:44

Ratings agency Fitch released a statement Thursday warning that South Korea's policy banks with exposure to troubled industrial sectors – like shipbuilding and shipping – may need additional capital if they are to engage in restructuring large enterprises. The statement echoed an announcement earlier this week by the nation’s Financial Services Commission that the government would seek measures to inject new capital into state-owned policy banks. 

"The large policy banks (whose ratings are underpinned by government support and aligned with the sovereign rating) are likely to need more capital if they are to play proactive roles in the restructuring process," Fitch said.
Shipping and shipbuilding are first on the list for FSC's restructuring plans. Fitch estimates that 11 percent of the two sectors' loans were non-performing at the end of last year, over five times the rate for the rest of the banking system.  It forecasts an increase in bad loans, as 17 percent of the sectors' debt is presently listed "precautionary-and-below," and revenues remain low. 

Fitch estimates total exposure of the South Korean banking system to domestic shipping and shipbuilding at about $80 billion, the overwhelming majority in the shipbuilding sector and in loans made by policy banks – specifically by KDB and KEXIM. Commercial banks are unlikely to be significantly affected, Fitch said.

South Korea's government has already put about $2.6 billion in new equity funding into KDB and KEXIM. Fitch said that new legislation would be required for the nation's central bank (Bank of Korea) to inject government capital into KDB – and that such a proposal could run into political opposition. 

In statements Thursday, KDB officials suggested that the shipping sector did not pose any trouble for the bank's reserves – but that large-scale restructuring in shipbuilding could put the bank in need of additional funding. 

"Most losses expected to be incurred by HMM were absorbed as last year's net loss and we have enough capacity to cover losses that may come from Hanjin Shipping," said KDB's senior executive director Lee Dai-Hyun. "If it is for the shipping industry only, we don't need a capital increase. However, more capital will be needed if there is a massive and rapid restructuring of the shipbuilding industry and if the industry aggravates faster."