Exchange Rate Surge Threatens Bank Soundness

The Korean won's sharp depreciation, with the USD/KRW rate soaring to 1530, is increasing the burden on banks to manage their financial health. The USD/KRW rate hit 1530 on the 4th, marking the first time it has surpassed the 1530 level since March 2009.

Banks have already seen a decline in capital adequacy indicators such as the Common Equity Tier 1 (CET1) ratio in the first quarter, influenced by increased corporate exposure and the expansion of risk-weighted foreign currency assets due to the rising exchange rate. The banking sector's soundness indicators, including the CET1 ratio, had already deteriorated in the first quarter due to factors such as the burden of high exchange rates.

According to the Financial Supervisory Service, the CET1 ratio for domestic banks stood at 13.41% in the first quarter, a decrease of 0.09 percentage points from the end of the previous year. The total capital ratio fell by 0.19 percentage points to 15.64% from the end of the previous year. The top five banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) followed a similar trend, with a few exceptions.

KB Kookmin Bank saw improvements in its CET1 ratio (14.93%) and Tier 1 capital ratio (15.37%), up by 0.02 and 0.01 percentage points respectively from the end of the previous year. However, its total capital ratio decreased by 0.19 percentage points over the same period to 17.10%. Shinhan Bank's CET1 ratio was 14.37% (-0.20 percentage points), its Tier 1 capital ratio was 15.18% (-0.24 percentage points), and its total capital ratio was 17.06% (-0.32 percentage points). Hana Bank's CET1 ratio was recorded at 16.27% (-0.15 percentage points), Tier 1 capital ratio at 16.44% (-0.16 percentage points), and total capital ratio at 17.35% (-0.27 percentage points). Woori Bank recorded a CET1 ratio of 14.89% (+0.76 percentage points), a Tier 1 capital ratio of 15.63% (+0.74 percentage points), and a total capital ratio of 17.44% (+0.63 percentage points). NH Nonghyup Bank's CET1 ratio was 15.08% (-0.15 percentage points), its Tier 1 capital ratio was 16.59% (-0.19 percentage points), and its total capital ratio was 18.01% (-0.26 percentage points).

The non-performing loan (NPL) ratio for domestic banks stood at 0.60% as of the end of the first quarter, an increase of 0.03 percentage points from the end of the previous quarter. KB Kookmin Bank's NPL ratio was 0.34% (+0.06 percentage points), Shinhan Bank's was 0.30% (+0.02 percentage points), Hana Bank's was 0.37% (+0.02 percentage points), Woori Bank's was 0.33% (+0.02 percentage points), and NH Nonghyup Bank's was 0.53% (+0.04 percentage points).

Meanwhile, the Bank of Korea governor hinted at a potential interest rate hike during a press conference following the Monetary Policy Committee meeting last month. A banking industry official commented, "From a bank's perspective, it would be correct to reduce lending if only soundness is considered, but we must also fulfill the role of expanding productive finance. We are continuing our efforts for stable asset management through continuous soundness monitoring and strengthening preemptive management systems."