Korean banking system stable
(2 June 2015 – Korea) The outlook for Korea’s banking system is stable with GDP growth remaining stable and asset quality recovering slightly compare to 2014, according to Moody’s Investors Service.
Moody’s last changed the outlook for Korea in 2010.
The ratings agency’s analysis is contained in its just-published report "Banking System Outlook: Korea," an overview of credit trends affecting the banking system in the next 12-18 months.
Moody's rates 17 banks in Korea.
"Our stable outlook, unchanged since 2010, reflects our expectation of a stable operating environment for banks in the next 12 to 18 months and strong systemic support," said Sophia Lee, a Moody's vice president-senior analyst.
"But we note that banks' asset quality faces tail risks from problematic sectors plagued by overcapacity, although we expect stable asset quality relative to 2014."
Although the low interest rate environment supports asset quality, Korean banks face contingency risks from corporate borrowers in industries facing long-term challenges, such as construction, shipbuilding and shipping, said Moody's.
Moody's believes that in 2015, bank profitability will deteriorate slightly from already low levels due to compression in net interest margins, while improvement funding and liquidity conditions will be maintained, supported by regulations and Korea's strengthened external position.
Moody's forecasts GDP growth at 2.5 percent-3.5 percent for 2015, creating a stable operating environment.
This will help keep asset quality largely stable, with nonperforming loans formation forecast at around 1.5 percent-2 percent of loans in 2015, compared to 1.6 percent in 2014 and 2.3 percent in 2013.
Declining interest rates and policy measures to boost liquidity will support borrowers' debt servicing ability.
Moody's noted that the high level of household debt to disposable income, which was at 156 percent in 2014, mainly affects banks through the persistent negative effect on domestic demand, rather than by posing a large direct risk to banks' asset quality.
Funding and liquidity for Korean banks will be stable, as banks reduce their reliance on short-term and wholesale borrowing.
Moody's also noted that Korean banks are extending the maturities of their foreign-currency debt and increasing foreign-currency deposits.
In addition, Korea's strong support system is a positive factor for the stable outlook, Moody's said.
Moody's ratings of Korean banks already incorporate an average of 3.9 notches of uplift from assumptions of systemic support.
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