The government of South Korea has announced plans to recapitalise the Korea Development Bank and the Export-Import Bank of Korea with a total injection of KRW11 trillion ($9.37 billion; €8.35 billion).
The extra buffer offered to KDB and KEXIM will be earmarked in the government's 2017 budget, with KEXIM due to receive KRW1 trillion by September.
A KRW11 trillion recapitalisation fund for the two banks will be set up with KRW10 trillion in loans from the Bank of Korea and KRW1 trillion in subordinated loans from Korea Asset Management. The policy banks can call the capital as needed, and the fund will purchase future KDB and KEXIM hybrid capital securities issuance.
The programme will bolster the banks' credit ratings, according to rating agency Moody's. “The plan clarifies the size and method of recapitalisation, and maintains the government's strong commitment to the banks. The two banks' Aa2 ratings benefit from nine notches of government support uplift,” said Sophia Lee, a vice president and senior credit officer at Moody's, in a statement.
Korean infrastructure companies could also benefit from the plan when they are investing abroad, expects Mic Kang, a Moody's vice president and senior analyst.
“In the domestic market, there will likely be little impact, because state-owned companies with strong fundraising ability lead infrastructure development. However, for overseas markets, stronger financing abilities of the two banks will be helpful to Korean private companies seeking overseas opportunities,” said Kang.
Last month, Korea offered a financial package worth $25 billion to help its infrastructure companies win projects in Iran. KDB and KEXIM have agreed to finance part of the bill to ease Korean firms' entry in the market.
KDB and KEXIM are major creditors to shipping and shipbuilding firms which are now under restructuring process, as well as infrastructure companies investing in overseas markets.
The recapitalisation measures aim to ensure state lenders can withstand losses as they facilitate the restructuring process.
The government's plan is an effort to boost KEXIM's current weak capitalisation. It also prepares for the policy banks' potential increase in provision charges should the corporate sector restructuring fails to pan out as planned.
The government estimates the two banks will need to receive about KRW5-8 trillion to maintain total capital ratios of 13 percent for KDB and 10.5 percent for KEXIM. KDB's current ratio is 14.6 percent while KEXIM's is 9.9 percent.
The government also plans to call for a direct capital injection from the central bank into KEXIM, should there be a risk to financial sector stability. It may eventually acquire the central bank's incremental stakes in KEXIM. As of June 2016, the Korean government holds a 70 percent stake in KEXIM, while Bank of Korea and KDB hold 12.4 percent and 17.6 percent respectively.