[1mm Finance Talk] Why the Four Major Financial Groups Maintained a 13% CET1 Ratio Despite Expanding Risk-Weighted Assets

CET1 Ratio Maintained at 13.21%–13.74% in Q2

Rising RWA Typically Lowers CET1, But

Record-Breaking Net Income Offsets Increase in RWA

Strong Performance Continues Amid Falling Exchange Rate... Further Improvement Possible in Q3

The Common Equity Tier 1 (CET1) ratios, key indicators of financial soundness for the four major financial groups, all remained in the 13% range in the second quarter of this year. Despite an increase in risk-weighted assets (RWA)—a core factor in determining the CET1 ratio—the groups successfully maintained the "13% threshold." The record-high net income offset the negative impact of expanding productive finance, which carries higher risk weights, and the rising KRW/USD exchange rate, both of which presented challenging conditions.

According to the financial sector on August 5, the CET1 ratios for the four major financial groups (KB Financial, Shinhan Financial, Hana Financial, and Woori Financial) ranged from 13.21% to 13.74% as of the end of June this year. Group-by-group, the figures were ▲KB Financial 13.74%, ▲Woori Financial 13.71%, ▲Shinhan Financial 13.43%, and ▲Hana Financial 13.21%. The CET1 ratios for all financial groups except Hana Financial increased compared to the previous quarter.

The CET1 ratio is a core capital indicator that shows a financial institution's ability to absorb losses and is also used to assess the capacity for shareholder returns. A higher ratio indicates greater leeway for shareholder returns such as dividends and share buybacks and cancellations. In the market, the regulatory guideline of 13% set by financial authorities is seen as the critical threshold for shareholder returns.

This quarter's results are noteworthy because they were achieved even as RWAs, which make up the denominator of the CET1 ratio, increased. Usually, when RWAs rise, the CET1 ratio falls. However, this time, that formula did not apply.

The combined RWAs of the four major financial groups came to 1,290 trillion won as of the end of June this year, an increase of 4.6% from 1,233.3843 trillion won at the end of last year. The increase persisted compared to 1,266.6589 trillion won at the end of the first quarter of this year. This resulted from an overall expansion in group assets, a rise in corporate lending with higher risk weights, and an increase in the won-converted value of foreign currency assets due to the appreciation of the dollar against the won.

Despite these factors that typically lower the CET1 ratio, the ratio not only held the 13% range but in some cases even increased, largely due to record-high net income in the second quarter. The combined net income of the four majors in the second quarter was 6.0097 trillion won, up 18.6% from 5.0648 trillion won in the same period last year. This surpassed last year's record-breaking results once again.

This exceptional performance raised the CET1 ratios of the four major groups by about 0.4 to 0.5 percentage points. For example, KB Financial Group, which posted the highest net income in the second quarter, saw the increase in net profit help raise its CET1 ratio by 0.54 percentage points quarter-over-quarter. While the rise in RWA reduced the CET1 ratio by 0.15 percentage points, the contribution from net income not only offset this but also resulted in a net increase in the ratio.

In the third quarter, there is a possibility that the CET1 ratio could further improve as the pace of RWA growth slows. This is because the four majors have started to control the rate of RWA growth, and, since the end of last month, the decline in the KRW/USD exchange rate has reduced the burden of revaluing foreign currency assets in won terms. Both factors could contribute to a decrease in RWAs.

An industry official said, "The recent decline in the exchange rate increases profits from currency translation, which in turn supports overall earnings," adding, "While expanding productive finance will inevitably increase RWAs, it will also act as a factor in reducing the burden of CET1 management."

This content was produced with the assistance of AI translation services.