FTC and FSS actions over bond auctions, LTV information sharing, ELS mis-selling and ETF trust fees are adding to capital strain, with analysts warning lending capacity may tighten.
South Korea's major banks are coming under simultaneous pressure from competition and financial regulators, forcing the sector to build about 930 billion won (approximately $651.6 million) in provisions and raising concern that weaker capital positions could curb lending. The latest trigger is a Fair Trade Commission (FTC, South Korea's competition regulator) review into alleged collusion in government bond auctions by 15 primary dealer (authorized auction participant) entities, including KB Kookmin Bank, NH Nonghyup Bank, Industrial Bank of Korea, Hana Bank and Korea Development Bank. The FTC estimates the bid volume tied to the case at about 76.2 trillion won (approximately $53.4 billion), far above the 6.8 trillion won figure linked to the January loan-to-value, or LTV, information-sharing case, though market participants expect any final fine to come in well below the statutory maximum. That inquiry lands on top of existing penalties and unresolved compensation issues. In January, the FTC fined KB Kookmin, Shinhan, Hana and Woori Bank a combined 272 billion won (approximately $190.6 million) for sharing LTV information from 2022 to 2024, and the Financial Services Commission is reportedly reviewing another roughly 600 billion won (approximately $420.4 million) in sanctions tied to Hong Kong H-Index equity-linked securities, or ELS (structured products linked to stock indexes). Banks have already booked sizeable reserves, including 333 billion won at KB Kookmin Bank and 184.6 billion won at Shinhan Bank. Analysts say the impact goes beyond earnings because fines and compensation flow through non-operating losses, reduce retained earnings and weaken Common Equity Tier 1, or CET1 (a core bank capital measure), ratios. Based on domestic banks holding CET1 ratios around 13%, a 100 billion won decline in net income would require about 770 billion won (approximately $539.5 million) of risk-weighted assets, or RWA (assets adjusted for regulatory risk), to be cut or replaced with fresh capital. In mortgage terms, using a 35% risk weight, that implies more than 2.2 trillion won (approximately $1.5 billion) less credit supply. The Financial Supervisory Service (FSS, South Korea's financial watchdog) is also widening scrutiny of ETF trust sales, starting with on-site inspections at KB Kookmin Bank, Woori Bank and NH Nonghyup Bank on the 10th and expanding to Shinhan Bank, Hana Bank and SC First Bank from the 24th. The watchdog is examining whether banks steered customers into front-end fee structures that were disadvantageous during repeated early redemption and re-subscription cycles. Its findings show average holding periods of just 42 days, with 94.6% of transactions ending within six months and 37.9% redeemed within 10 days. The FSS said banks collected 394.8 billion won (approximately $276.6 million) in fees, or 7.2 times the 54.5 billion won (approximately $38.2 million) it calculated would have been appropriate if customers had selected fee structures suited to their investment horizon. The pressure comes as loan growth and credit risk are both rising. Household loans at the five major banks reached 778.98 trillion won (approximately $545.8 billion) at the end of last month, while estimated loss loans climbed 26.6% year on year to 1.21 trillion won (approximately $848.5 million), the highest level since the second quarter of 2019. With five-year fixed mortgage rates already ranging from 4.74% to 7.50% and some forecasts pointing to rates above 8%, banks are tightening lending standards even before the regulatory and legal overhang is resolved.