Banks Facing Funding Shortages, Will They Resume Issuing Bank Bonds?

[Asia Economy Reporter Song Hwajeong] As Hana Financial Group moves to issue hybrid capital securities, attention is focused on whether the issuance of bank bonds, which had been halted due to concerns over liquidity tightening in the bond market, will resume.

According to the Financial Supervisory Service's electronic disclosure system on the 1st, Hana Financial Group decided at its board meeting on the 25th of last month to issue hybrid capital securities worth 270 billion KRW. The funds will be used for 78 billion KRW in operating capital and 192 billion KRW for debt repayment. Hana Financial Group stated that this issuance of hybrid capital securities aims to enhance the Bank for International Settlements (BIS) capital adequacy ratio by expanding other Tier 1 capital.

A Hana Financial Group official said, "Regarding the debt repayment funds, this is a refinancing issuance maturing in the first quarter of next year," adding, "If market demand supports it, we plan to proceed as soon as possible."

This year, financial holding companies and banks have been rushing to issue hybrid capital securities. To respond to the outflow of low-cost deposits and the increase in corporate loans, they have been raising funds through bank bond issuance, and especially to meet BIS capital ratio regulations, they have steadily issued hybrid capital securities, resulting in a record high scale of hybrid capital securities issuance by financial holding companies and banks this year.

However, following liquidity tightening triggered by the Legoland incident in October, financial authorities urged restraint in bank bond issuance to prevent the buildup effect of corporate bonds caused by the issuance of high-quality bank bonds. As a result, there were no bank bond issuances excluding policy banks throughout November.

With fundraising through bank bonds blocked, banks turned to raising funds by increasing deposit interest rates, but recently, financial authorities requested restraint in deposit interest rate competition, effectively blocking fundraising through deposit rate hikes as well. Financial Services Commission Chairman Kim Joo-hyun emphasized at the financial market status review meeting on the 25th of last month, "Excessive competition for securing funds in the financial sector can act as a destabilizing factor in the financial market, so it is necessary to refrain from excessive competition both between and within sectors."

With corporate loans continuing to rise amid instability in the corporate bond market, banks that need to secure resources are facing a difficult situation. According to the Bank of Korea, as of the end of October, the outstanding corporate won-denominated loans by banks amounted to 1,169.2 trillion KRW, an increase of 13.7 trillion KRW in just one month. This marked the largest monthly increase since statistics began in June 2009.

In response, financial authorities are also considering resuming bank bond issuance. Kwon Daeyoung, Standing Commissioner of the Financial Services Commission, said at a briefing held after the emergency macroeconomic and financial meeting on the 28th of last month, "Considering that the bond market is currently stabilizing somewhat, we are thoroughly reviewing the methods of bank bond issuance and will ensure that banks do not face difficulties at the end of the year."

[Image source=Yonhap News]