S.Korea banks plan to boost capital ratios -FSC

SEOUL (Reuters) - South Korean banks are moving to bump up their capital ratios via new bond sales and the government will support their plans with a variety of steps, the country's top financial regulator said on Thursday.

Concerns about banks' financial health have escalated since medium-sized builder Shinsung Engineering & Construction 001970.KS sought court protection on Wednesday to avoid bankruptcy.

Analysts say the government's push for banks to lend to smaller firms could create a pile of bad loans as the world economy is bracing for a recession, despite a recent series of rescue packages from global governments to shore up bank liquidity.

The Financial Services Commission (FSC) said in a statement that domestic lenders planned to lift their capital ratios to 11 percent in a voluntary and pre-emptive manner by selling subordinated bonds and other measures.

South Korean banks' capital ratio, guided by the Bank for International Settlements (BIS), slid to an average 10.79 percent at the end of September, the lowest in seven and a half years, due to investment losses and an increase in risky assets.

"The financial regulator will support those plans through a variety of methods, such as guiding them to expand retained earnings and a delay in full adoption of Basel II requirements," it said.

FSC Chairman Jun Kwang-woo will hold a briefing at 0600 GMT to explain government policies on capital markets and the economy, spokesman Yoo Jae-hoon said.

The statement came after the Maeil Business daily reported on Thursday that the government was considering setting up a fund led by state-owned Korea Development Bank (KDB) and pension funds to buy subordinated debt or preferred stocks of banks, citing unidentified regulatory and industry sources.

The FSC denied the report, saying it had not studied the plan.

KDB spokesman Sung Joo-young said it was unaware of the reported fund establishment.

National Pension Service spokesman Kim Moon-soo said the pension fund had no current plans to support banks' capital increases.

Separately, an official at the finance ministry told Reuters that the government did not see a need for capital injections into domestic banks for now.

Commercial banks in South Korea are required to keep a more than 8 percent capital ratio in reserve. Domestic lenders retained more than 12 percent ratios on average in both 2006 and 2007.

KB Financial Group (105560.KS), parent of top domestic retail bank Kookmin, had reported a fall in its capital ratio to below 10 percent at the end of September as its bad loan charges climbed to a two-year high.

Banking stocks underperformed the broader market, with fourth-ranked Hana Financial Group (086790.KS) skidding by its daily ceiling of 15 percent by 0347 GMT, versus a 5 percent drop in the benchmark KOSPI .

Hana shares also tumbled by 14 percent on Wednesday on market talk of a possible capital increase, which the group denied as groundless.