KDB’s financials at worst in 23 years as companies need more funds

Korea Development Bank [Photo by Lee Chung-woo]

State-run Korea Development Bank is faced with its financials in the worst situation in 23 years as a plan to increase its capital is being delayed and losses from its stake in the country’s utility company snowball because electricity fee increases are pushed back.

The bank has served as a reliable source of funds for companies during an economic downturn through policy financing, but it is now in urgent need of funds. In other words, the damage from government policies is spreading to corporate financing.

KDB’s BIS capital adequacy ratio stood at 13.08 percent at the end of March, the lowest level since 2000 when it was 11.38 percent, according to data from the bank obtained by Representative Kim Hee-gon of the ruling People Power Party on Wednesday. KDB’s ratio is on the verge of falling below the international standard for the first time in 23 years, as Bank for International Settlements (BIS) recommends 13 percent as the minimum capital adequacy ratio.

KDB’s BIS ratio has been on a downward trend from 15.96 percent in 2020, 14.88 percent in 2021 and 13.40 percent at the end of last year. This is in sharp contrast to the BIS ratios of the country’s four major financial holding companies, including Shinhan Financial Group Co., which far exceeded 15 percent at the end of March.

KDB is the biggest shareholder of Korea Electric Power Corp., which posted a record loss last year due to ballooning crude and gas prices. The government has yet to decide on the increase of electricity fees for this quarter as it demands the state utility company to come up with aggressive restructuring plans.

The government provided KDB with 565 billion won ($429.25 million) and 435 billion won worth of Korea Land & Housing Corp. shares at the end of last year and in March, respectively, to improve the bank’s BIS ratio, but it rather deteriorated.

The deterioration of KDB’s financial soundness seems to be shrinking its supply of corporate funds significantly. The bank’s total corporate loans shrank to 246.9 trillion won in March from 247.1 trillion won at the end of last year. The bank’s corporate loans amounted to 205.5 trillion won in 2020 and 228.4 trillion won in 2021.

There is mounting criticism in the business circle about the lack of support from local policy financial institutions as companies are in urgent need of funds for investments to survive in the face of a realignment of the global supply chain. Policy institutions aren’t taking pre-emptive actions to provide support measures.

“Now is the opportune moment to seize opportunities as the global supply chain is being realigned, but the attitude of policy financial institutions, including KDB, is very disappointing,” said a large company official. “They simply maintain their existing support framework when companies are suffering from the lack of funds due to the worsening economy.”

[Photo by MK DB]

There are also complaints about policy financial institutions care more about the political circle than fostering competitive companies. Another official from the business circle argued that it is absurd to see criticism being raised about preferential treatment for large companies or support for specific companies and regions, instead of supporting those trying to make money by exporting.

The official asserted that as far as industry and the economy are concerned, it is important to approach based on efficiency and profitability, instead of dealing with them only based on politics could incur losses to large corporations.

America’s Inflation Reduction Act (IRA) and CHIPS and Science Act (CHIPS Act) and Europe’s Critical Raw Materials Act (CRMA) all contain support measures to attract companies with the goal of establishing a supply chain in their own countries.

“Each country is competing to attract such industries as semiconductors, batteries, automobiles and biotech while ignoring the existing World Trade Organization (WTO) trade order,” said a major company official, expressing his disappointment with both the quantity and quality of measures the Korean government recently offered after it was heavily criticized for its slow response to the IRA last year.

The government recently revised the Restriction of Special Taxation Act to increase facility investment in national strategic technologies such as semiconductors and raised tax credit rates to a maximum of 28 percent this year on a temporary basis.

Policy financial institutions have their own complaints. They say that they are trying to provide as much support as possible within the allowed loan limit for specific companies. This means that domestic companies, including conglomerates, have already maxed out their loan limits as they are investing a lot of money in facility investment to reorganize their main industries from traditional manufacturing to advanced industries.

“Large companies will be able to raise funds not only in Korea but also in the global market, but they want to receive policy financial support in order to build diverse portfolios,” said an official from the financial sector.