Woori Bank Supplies 400 Billion Won in Inclusive Finance in First Half... Ongoing Challenges Remain

Sae-Hope House Loans Reach 412.3 Billion Won
The CET1 Ratio Remains Strong in Q2
Effective Incentives Needed for Inclusive Finance
Expansion of Supply Likely to Continue in the Second Half

Woori Bank supplied more than 420 billion won in inclusive finance to low-income individuals in the first half of this year, actively aligning itself with the government’s drive to expand inclusive finance. However, as lending to individuals with mid- to low-credit scores increases, the bank’s risk-weighted assets (RWA) are expected to rise, leading to a greater burden in managing its Common Equity Tier 1 (CET1) ratio. Industry observers argue that, in order for banks to continue expanding inclusive finance offerings, effective incentives are needed to ease the capital requirements burden.

According to the financial industry as of August 7, Woori Bank provided a total of 421.8 billion won in inclusive finance products from January to June this year. By product, the Sae-Hope Hollssi accounted for most of the sum at 412.3 billion won. The Saitdol mid-interest loans totaled 7.8 billion won, while the special guarantee and general guarantee products under the Saessallon program stood at 1.3 billion won and 400 million won, respectively.

Based on the supply performance of major inclusive finance products like Sae-Hope Hollssi, Saitdol, and Saessallon, Woori Bank is considered to have the largest volume of inclusive finance among major commercial banks in the first half of the year. This is interpreted as a result of the bank actively increasing funding to low-income and low-credit borrowers in line with the government’s inclusive finance policy.

Sae-Hope Hollssi is an unsecured credit loan supplied to low-income and low-credit borrowers using the bank’s own resources and credit assessment. Saitdol loans are mid-interest products provided to individuals with mid- to low-credit scores with guarantees from Seoul Guarantee Insurance. Saessallon is a guaranteed product from the Korea Inclusive Finance Agency, integrating both Worker Saessallon and Saessallon Bank products. The Saessallon Special Guarantee, which integrates the existing Saessallon 15 and the special guarantee for lowest-credit borrowers, is designed to support those with the lowest credit scores who face challenges accessing loans from traditional financial institutions.

As Inclusive Finance Increases, RWA Also Rises... CET1 Management Burden

The problem is that as supply of inclusive finance grows, so does the capital burden on banks. In particular, the Sae-Hope Hollssi product, which makes up a large portion of inclusive finance, requires the bank to take on the borrower's credit risk directly. Unlike guaranteed loans, the entire credit risk of the loan is reflected in the bank’s RWA calculation, resulting in a relatively higher CET1 ratio management burden.

The CET1 ratio is calculated by dividing common equity by risk-weighted assets. Loans to mid- to low-credit borrowers, which generally lack collateral or guarantees, tend to have higher rates of default probability and loss given default. Therefore, even for the same loan amount, RWA increases far more rapidly for these products than for secured loans with high-quality collateral. Ultimately, when the pace of RWA growth exceeds capital accumulation from profits, the CET1 ratio drops, reducing the available capital for other asset investments.

Woori Financial Group’s capital ratio is not currently in a vulnerable state. As of the end of the second quarter this year, the group's provisional CET1 ratio stands at 13.71%, up 0.11 percentage points from 13.60% at the end of the first quarter. This is also 0.91 percentage points higher compared to the 12.80% at the end of the second quarter last year. In the same period, KB Financial Group registered a CET1 ratio of 13.74%, Shinhan Financial Group 13.43%, and Hana Financial Group 13.21%. Woori Financial Group has rapidly raised what was once the lowest CET1 ratio among the top four financial holding companies, through asset growth management and internal credit rating model improvements.

However, insiders at Woori Bank believe that as the bank continues expanding inclusive finance, the burden of capital adequacy management will inevitably grow. They warn that maintaining the current CET1 ratio while simultaneously expanding inclusive finance, productive finance, and shareholder returns may prove challenging.

A financial industry official familiar with Woori Bank’s situation commented, "Woori Bank has made considerable efforts to narrow the CET1 ratio gap with other financial holding companies by reinforcing RWA management. While there were efforts to curb asset growth last year, this year the bank has worked to actively expand related assets in accordance with the government’s focus on productive and inclusive finance, while also facing the ongoing challenge of maintaining CET1 ratio stability."

The official added, "If we are to maintain this policy in the second half of the year, as the government is emphasizing inclusive finance supply more than ever, incentives for relaxed capital regulations will be essential to offset the burden of potential loan defaults and other risks."

Another industry official stated, "It is not just Woori Bank, but all commercial banks facing considerable concern over the scale of inclusive finance supply. Given that these capital requirements are linked to the Basel III regulatory framework, it may be difficult to sharply lower the risk weights applied to loans for mid- to low-credit borrowers. Nevertheless, there is a need to develop measures that more precisely reflect actual risks and the policy guarantee effects."

The capital burden of inclusive finance is expected to rise even further for the banking sector going forward. According to the financial authorities, the five largest financial holding companies plan to supply a total of 70.7672 trillion won in inclusive finance from this year through 2030, with 11.2912 trillion won already delivered in the first half of this year alone. Notably, the banking sector set this year’s Sae-Hope Hollssi supply target at 5.1 trillion won, a 20.1% increase from last year’s target of 4.2 trillion won.

Regulators are also acknowledging the issue, pledging to rationalize regulations that hinder inclusive finance expansion. Proposals being considered include offering banks with outstanding inclusive finance performance a reduction of at least 10% in their contributions to the Korea Inclusive Finance Agency, and varying contribution adjustment rates based on comprehensive evaluation results. Prudential regulations are also being reviewed, with plans to broadly assess the risk weights for mid- to low-credit loans, the asset quality classification standards for restructured receivables, and the reserve requirement standards for loan-loss provisions.

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