Agency says consumer loan, M&A and foreign currency liquidity problems unlikely to ease soon


Moody’s Investors Service on Monday highlighted several uncertainties in the local banking industry, saying that unfavorable factors could hamper banks’ long-term growth.

Negative factors cited by the ratings agency included growing consumer loans, M&A issues and foreign currency liquidity.

“A key credit issue facing the system is high and rising consumer leverage,” Moody’s vice president and senior analyst Choi Young-il said in his report “Banking System Outlook: Korea.”

He said Moody’s sees Korea’s household debt to disposable income ratio as one of the highest globally, and that it continues to rise.

Moreover, he said, a high proportion of this household debt burden consists of interest-only, floating-rate mortgages, which means that there is little natural amortization of the debt burden as loans season, and servicing costs increase with interest rate rises.

“The problem of high consumer leverage is unlikely to ease within the foreseeable future.”

Kim also commented on the future ownership of the three major banks ― Woori Bank, Korea Development Bank and Korea Exchange Bank.

“The lack of clarity about the future of the industry’s make-up and the extent of long-term government control over important segments of the banking system creates uncertainties regarding the competitive dynamics and long-term profitability prospects of the banks,” he said.

Foreign currency liquidity was another issue, he said. Korean banks rely heavily on market funding amid the lack of a stable foreign-currency deposit base, which exposes them to refinancing risks in the event of a capital market freeze, according to his report.

Moody’s said, however, that the outlook for Korea’s banking system is stable over the next 12 to 18 months.

The agency’s positive outlook over the medium-term is based on the expectation of sustained economic growth and a modest improvement in the sector’s financial metrics.

“While the issues may not become major ones for the banks in the next 12 to 18 months, Moody’s does not feel it is appropriate to signal a positive outlook as long as they exist as challenges to the long-term health of the banking system,” Kim said.

By Kim Yon-se (kys@heraldcorp.com)