Here's how much Daegu Bank will benefit from the KRW200b capital injection

All thanks to its parent company.

Korea-based DGB Financial Group (DGB FG) has recently announced that it will issue KRW434 billion of new equity and inject KRW200 billion into its subsidiary Daegu Bank Ltd. and KRW150 billion into its subsidiary DGB Capital.

According to a research note from Moody's Investors Service, DGB FG also entered into an agreement to acquire 98.9% of Woori Aviva Life Insurance for about KRW70 billion, or 0.5x price to book value of the insurer, from NH Financial Group, the parent company of NongHyup Bank.

The transaction is credit positive for Daegu Bank, which will benefit not only from the capital injection, but also reduced pressure to upstream earnings to DGB FG.

The capital injection will also alleviate capital pressure from Daegu Bank’s current above-average loan growth.

Its loan book grew at a compound annual growth rate of 8.0% from 2011-13, much higher than the South Korean average of 1.9%.

Without the capital injection, the bank’s credit quality would likely deteriorate from the high loan growth.

Here's more from Moody's Investors Service:

The bank has weaker capital metrics than the major national banks. The KRW200 billion capital injection from its parent will boost Daegu Bank’s common equity capital ratio and Tier 1 capital ratio by around 74 basis points to 10.07% and 11.14% on a pro- forma basis from 9.33% and 10.40% as of June 2014.

Moreover, DGB FG’s pro forma double leverage ratio will slightly improve to 103.9% from 105.4% as of June 2014. This is well below the industry average double-leverage ratio of 114% as of June 2014, as shown in Exhibit 3.

The acquisition will also benefit Daegu Bank by relieving the financial pressure it would otherwise face to upstream earnings to its parent.

As of June, Daegu Bank accounted for 99% of the consolidated assets of DGB FG, a percentage we expect to fall to 90% after the acquisition.

We expect Woori Aviva to start contributing to DGB FG’s dividend income within the next two to three years. While the insurer is not profitable this year because of a write down in its intangible assets, we expect profitability will improve next year.

The insurer already has a solid franchise in the Seoul and Busan areas, and should be able to capitalize on Daegu Bank’s strong foothold in the Daegu-Gyeonbuk area.

In addition, DGB Capital could also contribute more of its dividend to DGB FG going forward. The capital injection will relax DGB Capital’s constrained capital position, which has capped its growth and earnings contribution despite its high return on assets of 1.09% for the first half of this year, compared to Daegu Bank’s 0.70%.