3 reasons why Korean banks' capitalization levels will be well supported in the next 18 months

The slower 2.5% growth in assets is one.

According to Moody's, the banks’ capitalization levels will be well supported in the next 12-18 months, owing to:

-- Slower growth in assets. The slowdown in asset growth, to 2.5% in 2012 from 6.9% in 2011, was one of the reasons behind the improvement in the system’s equity-to-total-assets ratio in 2012.

We expect a continuation of this trend in 2013, as the banks remain cautious in their lending, given the modest rate of economic growth. Banks’ key capital measures are either strong or improving.

-- Increasing equity contributions to core capital.The banks have been retaining more of their earnings, under stricter regulatory oversight. This has allowed them to maintain their Tier 1 ratios, even as their risk weighted assets (RWA) growth was higher than asset growth due to tighter prudential regulations.

-- Contingent credit loss reserves. The industry’s rising equity-to-asset ratio in recent years also reflects the creation of this accounting item, which is a component of equity but not Tier 1 capital. The contingent credit loss reserves explains around 50 basis points of improvement in the system’s equity-to-total-assets ratio.

Here's more from Moody's:

Almost all banks satisfy the minimum capital requirements specified under Basel III, despite the decision by Korean regulators to delay implementation.

Our two-scenario stress test testifies to Korean banks’ resilience. In our Adverse Scenario, we based our assumptions on the loan lossexperience seen during the global financial crisis in 2008-2009 for corporate loans, and during the credit card crisis in 2003 for household loans. Under this scenario, the bank’s Tier 1 ratio would fall by 0.6 percentage points to 10.6%.

In our Highly Adverse Scenario, we calibrate our loss assumptions to the extremely distressed period of the Asian financial crisis in 1998. In this scenario, all our rated banks would report net losses and their Tier 1 ratio would drop by 3.3 percentage points to 7.9%, but still well above the regulatory minimum of 4%.