Loans fast becoming a risky business

Korea’s banking sector may have nothing to do with Tom Cruise, star of the film Risky Business or his penchant for the occult for that matter, but one thing is certain, loans are becoming a risky business for Woori Financial Group. So far this year, Woori has been plagued with a spate of non-performing loans or NPL’s and the nasty little critters just don’t seem to be going away. A worrying trend seems to be developing at the bank with a dramatic increase in new NPL formation to USD616 million in the third quarter of 2008. So why should Woori worry? Should new NPL formation exceed USD771 million in the subsequent financial quarters of 2009 and provision rates escalate above 60 percent, provisions in the realm of USD463 million per quarter could be a realistic scenario in the next 18 months or so, according to UBS analyst, SoYoung Kim. Kim expects there to be a “higher level of provisions at USD494 million in the fourth quarter of 2008 as this period will see more SME bankruptcies, particularly as borrowers face year-end audits and scrutiny.” The Korean lender just happens to have the largest SME loan portfolio of all Korean banks at USD72 billion. So how will the increase in new NPL’s and provisions affect Woori’s bottom line? The bank is expected to hit losses in the fourth quarter of 2008 and this coupled with the possibility that 2009 provisions may be front-loaded to the first quarter of 2009 could result in “Woori’s Tier 1 ratio dropping from 7.6 percent down to 6.4 percent,” said Kim. So what can Woori do to perk up its Tier 1 ratio? The bank needs over USD1.5 billion in new Tier 1 capital in order to lift its ratio above 7.5 percent. “Woori may need to issue Tier 1 equity in 2009 in a range of USD1.5 trillion,” which represents 34 to 42 percent of its current market cap,” said Kim. While it seems like Woori and other banks are never too far from the bad news, the Korean lender should be able to breathe a sigh of relief now with earnings expected to jump from USD77 to USD193 milllion in the second quarter of 2009 and NPL’s remaining “relatively low at 0.8 percent of USD2 billion in loans,” said Kim.