Another tough year for South Korean banks, says RAM

Published on 13 March 2015 RAM Ratings expects South Korean banks to continue facing pressure vis-à-vis asset quality and earnings this year. The private sector’s investment appetite and consumer sentiment remain constrained by the spectre of a decelerating Chinese economy (South Korea’s key export market), an uneven global recovery, a competitive Japanese yen and high household debt levels. On the other hand, the industry’s capitalisation is still deemed adequate. Credit expansion in the South Korean banking system is expected to be more subdued in 2015, after the better–than-anticipated loan growth last year, which came up to an annualised 6.6% as at end-September 2014 (2013: 4.3%). “Although system-wide asset-quality indicators held steady in 2014, they may weaken amid the sluggish macroeconomic environment,” cautions Wong Yin Ching, RAM’s Co-Head of Financial Institution Ratings Department. “The system’s improved annualised credit-cost ratio of 0.5% for 9M 2014 is likely to be transient,” she adds. South Korean banks actively write off and dispose of impaired loans, and have been observed to make heavy provisioning, typically in the last quarter of the year. Impaired loans amounted to KRW26.1 trillion as at end-September 2014, translating into a gross impaired-loan (GIL) ratio of 1.72% (end-December 2013: 1.79%). The system’s GIL coverage ratio, albeit declining, remained healthy at 117.2% as at the same date. South Korean banks also face bleak earning prospects, marked by one of the region’s lowest returns on equity - a result of intense competition, depressed interest rates, tough regulations and strong labour unions. In the past 3 years, certain domestic banks and subsidiaries of global banks have either exited or reduced their branch networks due to anaemic growth prospects and diminishing profits. With the benchmark interest rate at a record low of 1.75% and potential credit losses from industries affected by the decelerating Chinese economy as well as the underperforming shipping, shipbuilding and construction sectors, RAM expects little improvement in South Korean banks’ near-term profit performance. RAM’s commentary on South Korean banks forms part of our Banking Bulletin 2015 - an annual publication since 2007. Click here to download our Standpoint Commentary on the South Korean Banking System – Another Tough Year for South Korean Banks. Media contact Chan Yin Huei (603) 7628 1180 yinhuei@ram.com.my