Korean banks' profitability predicted to suffer from tepid loan growth

How will it affect lending margins?

According to Moody's Report, tepid loan growth will pressure Korean banks' 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 pressure retail loan rates and fees.

Here's more:

In Korea, our stable outlook for the Korean banking system reflects our baseline assumption that Korea’s economy will continue to expand, as the effects of an expansionary fiscal policy support the real economy.

The country’s strong fiscal position and low inflation give the government latitude to stimulate growth and to mitigate the headwinds the economy faces, including the depreciation in the Japanese yen against the won, the sluggish property market in Seoul, and the high level of household debt.

The expected modest increase in GDP 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.

In terms of foreign currency liquidity, we believe the system is now more resilient than it was in 2008-09, suggesting that it is less vulnerable to external liquidity shocks.

Korean banks have been suffering from sustained asset quality pressure since the global financial crisis, and we expect this to persist due in part to the depreciation of the Japanese yen, which exerts pressure in terms of price competitiveness on Korean exporters.

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 asset quality.

Although Tier 1 capital ratios are declining, due to capital increasing 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.