DGB Financial Injects 100 Billion Won into iM Bank... "Capital Ratio Management" [1mm Financial Talk]

Not only business expansion of iM Bank
but also helpful for managing DGB Financial's capital ratio

iM Bank is set to receive another capital injection of 100 billion KRW from DGB Financial Group just five months after the last one. This is part of a plan to carry out a paid-in capital increase totaling 700 billion KRW over five years following its transition to a commercial bank. iM Bank will use these funds for business expansion, while DGB Financial Group will gain relief in managing its capital ratio.

The iM Bank board announced on the 7th that it will proceed with a paid-in capital increase of 100 billion KRW. The paid-in capital increase will be conducted through a rights offering, issuing 2 million new shares at a price of 50,000 KRW per common share. A rights offering means the company issues new shares and sells them to existing shareholders for cash. Since DGB Financial Group owns 100% of iM Bank, it will pay 100 billion KRW to iM Bank and purchase the shares.

This capital increase from DGB Financial Group to iM Bank is the second this year, following one in June. After receiving approval to convert to a commercial bank in May, iM Bank announced plans to conduct a paid-in capital increase totaling 700 billion KRW over five years. DGB Financial Group also stated it would raise the necessary funds for this capital increase through bond issuance. Specifically, it plans to raise 400 billion KRW via perpetual subordinated bonds (hybrid capital securities) and 200 billion KRW through corporate bonds.

This paid-in capital increase was conducted in the same manner as the one in June. The rights offering method and the way DGB Financial Group raised funds were similar. One month before iM Bank resolved the first capital increase in May, DGB Financial Group secured 100 billion KRW by issuing hybrid capital securities, and it issued hybrid capital securities again in August for this capital increase. Considering the remaining period of this year, iM Bank’s paid-in capital increase is expected to be completed at 200 billion KRW, with the remaining 500 billion KRW to be raised over the next four years.

The iM Bank board announced on the 7th that it will proceed with a paid-in capital increase of 100 billion KRW. Yonhap News

The reason behind iM Bank’s capital increase goes beyond securing funds for business expansion; it is also seen as a measure for DGB Financial Group to manage its capital ratio. The hybrid capital securities issued by DGB Financial Group are bonds but are recognized as capital in accounting, which raises the capital ratio upon issuance. As of the first quarter of this year, DGB Financial Group’s BIS total capital ratio stood at 13.83%, the lowest among banking financial groups. However, after issuing hybrid capital securities in May, the ratio rose to 14.06% in the second quarter and 14.49% in the third quarter.

The impact on the common equity tier 1 (CET1) ratio, which has been on the rise this year, is expected to be minimal. This is because iM Bank’s loan expansion has temporarily paused due to household loan regulations. DGB Financial Group’s CET1 ratio was 11.12% in the first quarter, 11.22% in the second quarter, and 11.83% in the third quarter, approaching its CET1 target of 12.3% by 2027.

Normally, issuing hybrid capital securities and participating in a bank’s paid-in capital increase can lower the CET1 ratio. Capital increased through hybrid capital securities is classified as other capital and does not affect the CET1 ratio. However, if the bank significantly expands loans, risk-weighted assets (RWA) increase, which lowers the CET1 ratio because bank loan assets are counted as holding company assets. Nevertheless, iM Bank is responding to the government’s household loan regulation policy by temporarily suspending the sale of certain personal loans through its mobile application for two months from December 1 to December 31.