The common equity tier 1 (CET1) ratio of KB Financial Group, which has provided the largest dividends among domestic financial holding companies, has fallen to the mid-13% range. This decline is attributed to the decrease in the value of foreign currency assets held due to the rise in the exchange rate of the won against the U.S. dollar. CET1 is a soundness indicator used to gauge dividend capacity. Domestic financial holding companies are using CET1 capital exceeding 13% for dividends.
Further declines in CET1 seem inevitable. This is because the Financial Supervisory Service noted that KB Financial and Woori Financial had not properly assessed hidden asset risks within the group and demanded that this be reflected. Woori Financial's CET1, which is below the recommended level of 12% by financial authorities, is expected to see its dividend capacity further diminish. This could also pose obstacles to expansion through acquisitions of insurance firms.
KB Financial revealed on the 5th that its CET1 ratio stood at 13.51% at the end of last year, down 33 basis points (bp = 0.01 percentage points) compared to the previous quarter. KB Financial's CET1 had steadily risen from 13.42% at the end of the first quarter last year to 13.60% at the end of the second quarter and 13.84% at the end of the third quarter, before dropping in the fourth quarter.
Na Sang-rok, Chief Financial Officer (CFO) of KB Financial, said, "The exchange rate of the won against the dollar rose above 150 won in the fourth quarter, increasing credit risk by 7.5 trillion won," adding, "This contributed to a 30 bp decline in CET1." CET1 is calculated by dividing a financial firm's common stock equity by risk-weighted assets (RWA) expressed in dollars. When dollar prices rise, RWA increases, leading to a lower CET1.
The Financial Supervisory Service's identification of 'capital ratio calculation errors' is also expected to impact CET1. The FSS revealed the day before that during the '2024 Financial Holding and Bank Inspection Results Mid-Announcement,' it found that the assessment of asset risks was not properly conducted, leading to errors in the CET1 calculation. A representative example is the failure to account for the estimated damages of a responsibility-construction type land trust as a loan loss reserve (the funds set aside for expected losses). The FSS explained, "If all asset risks are reflected, the CET1 of KB Financial and Woori Financial could decline by 10 to 20 bp."
KB Financial plans to reflect the financial authorities' concerns in its CET1 calculations starting in the first quarter of this year. A KB Financial official noted, "Due to the timing constraints following the announcement of the financial authorities' inspection results the day before, we plan to incorporate this starting in the first quarter of this year," and added, "We expect the CET1 to decrease by 10 bp (as of the third quarter of last year) due to the recognition of responsibility-construction type land trusts."
The problem lies with Woori Financial. Woori Financial's CET1 was 11.96% at the end of the third quarter last year. Currently, Woori Financial is the only one among the top five financial holding companies with a CET1 below 13%. Woori Financial's CET1 slightly increased from 11.99% at the end of 2023 to 12.04% at the end of the second quarter last year, before falling again.
Considering the impacts from the high exchange rates, it is very likely that Woori Financial's CET1 at the end of last year decreased compared to the previous quarter. If Woori Financial spends over 1.5 trillion won on the acquisition of Tongyang and ABL Life, its CET1 will inevitably drop further. A financial authority official noted, "CET1 is a soundness indicator that shows a financial firm's crisis response capacity," and added, "We will assess whether acquisitions significantly impact CET1 during the approval review process."