Korean Banks Slump After Bailout Fund Report Rejected

Nov. 13 (Bloomberg) --

Woori Finance Holdings Co. led declines in South Korean bank stocks after the financial regulator rejected speculation the government would set up a fund to help lenders raise capital.

The Maeil Business Newspaper reported today that the government planned a fund of at least 10 trillion won ($7.2 billion) to buy subordinated bonds and redeemable preferred shares from banks in a move to inject capital. Rhee Chang Yong, vice chairman of the Financial Services Commission, said in a telephone interview that while setting up a fund may be ``theoretically possible,'' it isn't on the agenda.

Governments in the U.S. and Europe have taken stakes in financial firms to help them survive the worst financial crisis since the Great Depression. South Korea, which already holds stakes in banks including Woori, last month pledged to guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets.

``Investors seem to think that Korean banks would ultimately need some kind of capital injection,'' said Mo Jae Sung, a fund manager who helps oversee the equivalent of $995 million at Hanwha Investment Trust Management Co. in Seoul. ``With bad loans rising and banks coming under government pressure to extend more loans, banks will need recapitalization.''

Fund for Bond Investments

Woori, 73 percent state-owned and parent of the country's second-biggest bank, fell by the daily limit of 15 percent to 5,300 won at the 3 p.m. market close, the lowest since May 2003. Hana Financial Group Inc. also plunged 15 percent to a record low of 16,850 won. The 54-stock Korea Financial Industry Index dropped 5.7 percent.

South Korea plans to set up a 10 trillion won fund -- to be pooled not just from state agencies but also from private financial firms -- to vitalize investments in corporate bonds, including those issued by banks, FSC Chairman Jun Kwang Woo later told reporters in Seoul. The fund, that would help lower the cost of financing, ``will be used at the minimum level to correct temporary market failures,'' he said.

``Injecting public funds is a very sensitive issue,'' Rhee said. ``Banks' individual efforts to improve their capital adequacy are expected to raise their capital ratios to above 11 percent by early December.''

Net income at South Korea's 18 banks slumped 36 percent to 8.4 trillion won in the first nine months of this year on higher provisions against bad loans, the Financial Supervisory Service said on Nov. 11. The average capital-adequacy ratio at South Korea's 18 banks dropped to 10.79 percent at the end of September from 11.36 percent three months earlier as a global market slump eroded shareholder equity, the agency said.

Bond Sale

``Korean banks' capital adequacy ratios are still very sound,'' Rhee said today. The government will leave it up to banks to improve their capital standing before the state considers any measures, he said.

Kookmin Bank, the country's largest, started selling 800 billion won of subordinated bonds this week after it depleted capital to set up its holding company, KB Financial Group Inc. The bank's Tier 1 ratio was 9.14 percent at the end of September. Woori Bank, whose Tier 1 ratio stood at 7.6 percent, is planning to sell as much as 1 trillion won of the notes before the end of the year.

KB Financial dropped 5 percent to 30,450 won, the lowest since the stock began trading in Seoul on Oct. 10. Shinhan Financial Group Co. lost 6.4 percent to 32,000 won.

To contact the reporters on this story: Bomi Lim in Seoul at blim30@bloomberg.net

Last Updated: November 13, 2008 02:25 EST

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