Hanvit Bank, South KoreaÆs largest commercial lender, could be in big trouble again. Despite having raised some US$850 million this year, Hanvit is in no position to reduce its exposure to KoreaÆs top conglomerates by the governmentÆs time frame of 2002 and may need a new cash infusion if it wants to meet bad debt charges and tougher government lending rules.

KoreaÆs banks have been told to limit their exposure to KoreaÆs chaebols to 25% of their capital by 2002. It is looking near impossible for Hanvit, even with a two-year time frame. HanvitÆs exposure to Daewoo is nearing W5 trillion ($4.2 billion). Its exposure to Hyundai group, where some units are in financial distress, is pegged in excess of W3 trillion. Last year, with shareholders' funds of W4 trillion, exposure to conglomerates needed to be cut to W1 trillion. This year, with its equity reduced to W2.6 trillion due higher bad debt charges in 1999, Hanvit will need to reduce its chaebol exposure to W650 billion.

Hanvit will find it harder to meet this target as bad debts erode its capital base. Bad debts are expected to soar at Hanvit Bank this year as one in five loans could turn non-performing, according to analysts. "WeÆre talking about possibly as much as 20%-30% in NPLs for banks with large exposures to the corporate sector this year, on a worst-case basis,ö says Scott Christensen, regional banking analyst at Jardine Fleming, based in Bangkok.

Other banking analysts donÆt think the problem will be so huge. ôWeÆre estimating 14% NPLs this year, and 17%-18% at most if Hanvit has to make provisions for some of the smaller Hyundai units. We donÆt think itÆll be higher than 20% because that would assume a collapse at stronger groups like Hyundai which we donÆt see happening,ö says a banking analyst at a foreign brokerage in Korea, speaking off the record.

Shares of Hanvit bank rose 23% on Tuesday, and another 4% to W1,980 in early morning trading on Wednesday. Even with the latest gains, the bank is still trading under its price-adjusted book value. ItÆs considered a far healthier bank than Philippines National Bank, perceived as the worst run in the Philippines, which trades at a comparable value.

A problematic history with capital

Hanvit, created in December 1998 from a government-led merger between ailing Commercial Bank of Korea and Hanil Bank, has had a hard time preserving its capital. In 1998, the bank got a W3.3 trillion capital injection from the government and sold W3.9 trillion in NPLs to KoreaÆs asset management company. The recap plan gave the government a 94.5% stake in Hanvit, boosted its BIS capital ratio to 12.05% and its shareholders funds to W3.84 trillion.

Still, by February 1999, Hanvit was back at the market for more funds. It raised US$850 million of subordinated junk bonds. The new capital was timely. Without the funds, Hanvit would have found it difficult to adequately provision for its bad debts.

In 1999, Hanvit saw non-performing loans rise to W5 trillion or 11% of its loan book. It set aside W2.744 trillion on a bank level and W3.9 trillion on a consolidated level. This NPL provisioning hit its equity base. Its shareholders funds fell from W4 trillion to W2.6 trillion. Without the bond issue, its equity would have fallen even further. The question this year is whether its reduced capital base will be sufficient to cover new bad debts in 2000?

Ask analysts, and the answer you get is probably no. Most analysts expect that Hanvit will require more capital than it has at hand to cover its bad debt charges in 2000. The bank has the largest exposure of any Korean bank to the collapsed Daewoo group. The bankÆs Daewoo exposure rose 33% from last yearÆs levels to an estimated W4.8 trillion in loans, as the government forced banks to keep credit lines open to Daewoo.

Throw in growing solvency problems among other Korean companies, amid the implosion of KoreaÆs investment trust industry, and Hanvit is almost certain to have trouble covering the debts arising from its loan book this year, analysts say.

Government: Call to Merge

KoreaÆs government isnÆt taking any chances. It is considering merging Hanvit with stronger banks such as Kookmin Bank or Shinhan, according to the Korea Economic Daily newspaper. ThatÆs despite recent remarks by the Minister of Finance and Economy, Lee Hun-jai, that the bank would post a profit after putting aside W1 trillion for bad loans, even though analysts say that figure is too low.

ôBasically, itÆs the governmentÆs problem,ö says a regional banking analyst in Hong Kong. "Government- owned banks such as Hanvit are going to be facing the worst problems. The government has to provide the liquidity and bail these banks out. But it shouldnÆt pursue a merger route. If you merge the strong with the weak, you run the risk of crippling the entire system and raising the cost of bank restructuring."

Despite the rhetoric, senior banking analysts say Korea's government will ultimately lean away from a forced merger process involving strong banks and weak banks. As one analyst remarked, every time a government official expresses the idea, the market collapses. "A more likely scenario is the government putting two or three bad banks together, injecting more capital, and thus minimising the risk to the better quality banks," says Jardine's Christensen.