On the morning of July 24 the board of Hana Financial Group Inc. (KRX:086790) approved a corporate value-up plan committing to a common equity tier 1 ratio above 13%. At the same meeting it approved the issuance of write-down contingent capital securities that do not count toward common equity tier 1 at all.

Both decisions are sensible. Read together they are a useful lesson in how bank capital actually works, and the filing for the second one contains terms that a US reader who followed the Credit Suisse episode in 2023 will want to see spelled out.

Up To ₩400bn Of Perpetual Capital, Priced Later

The instrument is Hana's twentieth series of domestic, bearer, unguaranteed, unsecured write-down contingent capital securities, which Korean filings also call hybrid capital securities. The face value shown in the disclosure is ₩270bn, and note two explains that the final amount will be set by book-building within a board-approved ceiling of ₩400bn.

The coupon is blank. It will be fixed at issuance from the demand-building result at prevailing market rates. So is the subscription date, the payment date and the lead underwriter, all of which the filing says will be determined later in consultation with the supervisor. Nine independent directors attended the board meeting and none were absent.

There is no maturity date. The filing states that maturity is deemed to arrive at the earlier of a bankruptcy declaration or the commencement of a liquidation outside bankruptcy or rehabilitation proceedings. In other words, never, in any ordinary course of events.

What there is instead is a call. The issuer may redeem between five and ten years from issue, at each quarterly coupon date after the call becomes available, and only with prior approval from the Governor of the Financial Supervisory Service. The filing goes further and states explicitly that no condition has been attached that would create an expectation of redemption or impose any practical obligation on the issuer to redeem. That language is there because regulators require it: if investors could count on a call, the instrument would be debt with a fixed life rather than capital.

The Trigger Is A Designation, Not A Number

The most important paragraph in the document concerns debt restructuring, and it is worth stating precisely.

The cause is the issuer being designated a troubled financial institution under Article 2, item 2 of the Act on the Structural Improvement of the Financial Industry. The scope is the entire principal and interest of the securities. The method is full and permanent write-down, effective on the third business day after the triggering event, and the write-down is explicitly not deemed a default or an insolvency event.

That is different from how most European AT1 instruments work. Those typically carry a mechanical trigger written as a CET1 ratio, commonly 5.125% or 7%, so a holder can watch the published capital ratio and estimate distance to trigger. Hana's trigger is a legal designation made by a Korean authority. There is no ratio to monitor.

Which is not to say it is worse. A point-of-non-viability trigger of this kind fires later, in practice, than a high mechanical trigger, because a bank can operate well below a 7% CET1 ratio without being declared non-viable. What it is, is less predictable. Holders are exposed to a supervisory judgement rather than to an accounting figure, and that judgement is made by an institution whose mandate is financial stability rather than bondholder recovery.

Written Down, Not Converted

The second thing to notice is that this is a write-down instrument, not a conversion instrument.

If the trigger fires, holders do not receive shares. The principal ceases to exist. Common shareholders, meanwhile, may still hold something, depending on what happens next.

That is precisely the sequence that caused the controversy when Credit Suisse's AT1 securities were written down to zero in March 2023 while its shareholders received UBS stock. Bondholders who assumed the ordinary hierarchy of claims would hold discovered that these instruments sit outside it by design. Hana's filing makes no attempt to obscure any of this, which is to its credit; the terms are laid out in plainer language than many European prospectuses manage.

For a common shareholder the read is the opposite and mildly reassuring. Every won of AT1 outstanding is a won of loss absorption sitting ahead of the equity in a stress scenario. Issuing ₩400bn of it makes the common stock marginally safer.

It Does Nothing For The CET1 Target

Here is where the two July 24 decisions interact, and where a lot of readers get confused.

Bank capital has tiers. Common equity tier 1 is ordinary shares and retained earnings. Additional Tier 1 sits above it in the stack and includes exactly this kind of perpetual, discretionary-coupon, loss-absorbing instrument. Tier 2 sits above that. The total produces the BIS capital ratio.

The filing states the purpose directly: to raise the BIS capital adequacy ratio through expansion of Additional Tier 1 capital. It does not say CET1, because it cannot. Not one won of this issuance counts toward the 13% common equity tier 1 target the same board set that morning.

So the two decisions are complements rather than substitutes. The CET1 target gets met by retaining earnings and by restraining risk-weighted asset growth, which is what the value-up plan commits to. The AT1 issuance lifts the total ratio more cheaply than common equity would, because it does not dilute anyone. A bank promising to return more than half of its earnings to shareholders has an obvious incentive to build the non-common layers of its capital stack, and that is what this is.

The Coupon Competes With The Dividend

One more feature matters for equity holders and it is easy to miss.

Coupons on these securities are paid out of distributable profit, the same pool Korean law requires dividends and buybacks to come from. AT1 coupons rank ahead of the common dividend. So a group targeting a payout ratio above 50% is adding a claim that gets served first.

The discretion runs the other way too. The filing states the issuer has full discretion to cancel the coupon, that cancellation is not a default, and that the only consequence relates to restrictions on common shareholder dividends. There is also a mandatory suspension: if Hana were designated a troubled institution, or received a management improvement recommendation, requirement or order from the Financial Services Commission, or fell below the required capital ratio including the conservation buffer, the coupon obligation is extinguished for the duration.

That is the structure working as intended. In good times AT1 holders get paid before common shareholders. In bad times they get paid nothing, and then written down entirely, while common shareholders may survive. Both groups should price it accordingly.

What To Watch

The coupon set at book-building, which the filing says will be determined later. That number is the market's price for a perpetual instrument with a discretionary coupon and a regulator-determined write-down trigger, issued by a group targeting 12% return on equity. A coupon at a modest spread over Korean government bonds says investors see the trigger as remote. A wide one says otherwise.

The second marker is the final size against the ₩400bn ceiling. Coming in at ₩270bn would suggest the board authorised headroom it did not need. Printing the full ₩400bn in a year when the group has also committed to returning more than half of earnings would say something about how tight the capital arithmetic actually is behind the value-up targets.