Korea announces structural change for loans

It's at the expense of banks.

Korea's Financial Supervisory Commission (FSC) announced on 26 Feb 2015, the details for the “Relief Loan” program, which will allow households with a floating rate interest-only mortgage loans to switch into fixed rate amortizing loans at lower rates without paying prepayment penalty (up to KRW20tr in 2015).

According to a research note from Nomura, these loans originated by the banks will be sold off to the Korea Housing Finance Corporation and then securitized and sold back to the banks (required to hold them for at least 1 year).

The Korean banks are essentially forced to sell KRW20tr floating rate mortgages yielding 3.4% plus (average yield of 3.4% in 4Q14) and switch into mortgage backed securities (MBS) yielding low-2% (10-year MBS currently yields 2.46%).

In addition, as asset duration increases, banks may switch out of longer dated bonds into shorter dated bonds further lowering the net interest margin.

Here's more from Nomura:

Regulator to force faster deleveraging - It seems to us that the regulator wants to increase the amortizing mortgage proportion at a faster pace than the previous plan.

The regulator is introducing this scheme even though the banks have already met the target to increase amortizing mortgage loan proportion to 25% by the end of 2015F, which was set by the previous plan.

Previously, the regulator had required the Korean banks to increase amortizing mortgage loan proportion to 40% by the end of 2017.

However, it seems that the target could be reached ahead of time through securitization. As the Korean households are forced to deleverage, we think that the household loan growth will likely continue to slow down.

Negative impact could be alleviated if the regulator include MBS in LCR. We think that the negative impact on the banks’ margin could be alleviated if the regulator allows the banks to include these MBSs in Liquidity Coverage Ratio calculations. However, the statement by the FSC did not address that issue.