Korean banks' credit growth in the low single digits can be sustained: Moody's

That's if GDP increases 3-4% in 2014.

Moody's Investors Service says that the outlook for the Korean banking system remains stable, reflecting the baseline assumption that Korea's economy will continue to expand, as the effects of an expansionary fiscal policy impact the real economy.

Here's more from Moody's:

"Our expectation of a modest increase in GDP -- 2%-3% in 2013 and 3%-4% in 2014 -- should ensure that credit growth in the low single digits can be sustained, contributing to the maintenance of current adequate levels of capitalization, without stressing the banks' improving funding and liquidity profiles," says Hyun Hee Park, a Moody's Analyst.

Park was speaking on the release of Moody's latest "Banking System Outlook Korea", which expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months. Moody's rates 18 operating banks in Korea, covering 100% of system assets, and with their bank financial strength ratings and adjusted baseline credit assessment (BCA) averaging C-/baa2.

However, Moody's also notes that Korean banks have been suffering from sustained asset quality pressure since the global financial crisis, and expects this pressure to persist in the coming 12-18 months due to i) weak global demand, especially from the developed markets and China, and ii) the recent depreciation of the JPY, which exerts pressure in terms of price competitiveness on Korean exporters.

Specific areas where we expect to see continuing credit quality pressure are in loans to the four troubled industries of construction, property project financing, shipbuilding, and shipping.

At the same time, the relatively strong financial health and improved underlying competitiveness of the corporate sector -- combined with government policies to support both the economy and struggling industries -- will mitigate the impact on the banks' asset quality.

Although Tier 1 capital ratios are declining, due to capital rising more slowly than risk weighted assets (RWA), the fall has been tempered by improved prudential regulations. Strengthened regulations include a requirement to maintain contingent credit loss reserves and limits on dividends. These factors have together assisted in improving the loss-absorption capacity of the banks.

However, tepid loan growth will pressure profitability levels, and an environment of low domestic interest rates will lead to further contraction in lending margins. President Geun-hye Park's pro-consumer stance will also pressure the industry to make concessions on retail loan rates and fees.