THREE South Korean banks have been put on 'outlook negative' by Standard & Poor's (S&P), blaming higher industry risks associated with the country's financial deregulation. The three were Hanil Bank, which carries an A-minus senior and A2 short-term rating for foreign currency, Korea First Bank (A-minus and A2) and Shinhan Bank (A and A-1). The ratings agency said the outlook changes mainly reflected higher industry risks associated with financial deregulation and strategies adopted by the banks in response to the subsequent pressure. 'The industry's higher-risk profile was demonstrated by the large unrealised stock trading losses incurred by the banks at half year,' the agency said. 'Further contributing to the growing concern are the negative effects of rapid asset growth and the declining capital levels.' It said Hanil's core profitability had come under pressure recently, and the problem was exacerbated by a sizeable increase in security valuation loss allowance in the first half. Although Hanil's asset quality had been increasing, weak capitalisation, a declining profit trend and tougher domestic competition would constrain its prospects for earnings in the near term, the agency said. Korea First was the hardest hit of the major Korean commercial banks because of the drop in the country's stock market in the first six months of this year, it said. As a result of large provision for valuation losses and higher loan-loss provisioning, Korea First incurred a non-consolidated net loss of 138 billion won (about HK$1.4 billion). The bank's core profitability was weak, and profit contributions from securities had increased considerably in recent years. While Shinhan was less affected by its stock-trading operations than the other two banks, its financial profile had also declined, the agency said. As a result of rapid asset growth and the government's regulated access to the capital market, its equities-to-assets ratio had had steadily declined in recent years. 'Although [Shinhan] bank increased its capital through a stock issuance in the first half of 1995, its constrained ability to further improve its capital and a less strong financial profile remain concerns to Standard & Poor's,' the agency said. Korea's financial institutions have come under increased pressure as the country moves closer to membership of the Organisation for Economic Co-operation and Development (OECD), the 25 top industrialised nations in the world. OECD membership carries with it a requirement for open financial markets, and Korea, accused of foot-dragging in this area in the past, has been moving to free up its banking sector. Korea has indicated that it does not expect to be ready for OECD membership until the end of next year. Membership had been expected earlier in the year. The ratings agency's announcement coincided with reports from Seoul yesterday that the government had unveiled a plan to further open the market to direct foreign investment. Korea's banking sector has also been under considerable pressure as a result of the pall over Japanese banks, which have been a major source of funds for Korean banks. As a result, some credit departments in financial institutions have categorised Korean banks with Japan, believing that weakness in one country may be reflected in the other.