S. Korean banking sector to recover
S. Korean banking sector to recover
Shin Jung-Won, Dow Jones, Seoul
The South Korean banking industry is likely to recover next year as provisioning levels fall but economic risks such as the weakening ability of households and companies to repay debt will pose a threat, said an analyst at Standard & Poor's Ratings Service.
"In the short term, the debt payment ability (of households and companies) will affect the industry the most," said Young Il Choi, S&P's credit analyst for South Korean financial institutions, in an interview with Dow Jones Newswires. "Banks have to strengthen their credit risk management particularly as the gap between companies with good credit status and those with poor status is widening."
Most analysts expect the banking industry to begin to recover as early as the fourth quarter as provisioning amounts, which rocketed during the second quarter due to the 1.55 trillion won (US$1=1,170 won) accounting scandal at SK Networks, shrink.
But Choi said other economic factors such as savings, investments, the employment rate and economic growth outlook will continue to hurt the banking industry's performance in the near term.
"The overall situation isn't good. Savings and investment rates have been falling in the past few years and the employment rate remains poor. The uncertainty over GDP growth and bubbles in the property market should also negatively affect banks," said Choi.
The South Korean economy grew 6.3 percent in 2002 but slid into recession earlier this year, its first since the Asian crisis of 1997-98. It shrank 0.4 percent in the first quarter from the previous quarter and a further 0.7 percent in the second quarter. The government and central bank officials have said that GDP growth could fall below 3 percent this year.
Savings deposits at local banks fell 700 billion won during the third quarter, compared with a rise of 200 billion won in the second quarter. Unemployment stood at 3.2 percent in September, a touch below 3.3 percent in August but well above 2.9 percent in September 2002.
Choi said a possible plunge in real estate prices also seriously threatens the banking industry's recovery.
Spiraling property prices, particularly in Seoul, have triggered a series of measures so far this year including higher taxes and restrictions on mortgage lending.
The government is expected to announce another set of measures Oct. 27.
"Although the default ratio on mortgage loans has been climbing, it hasn't so far become a big problem for the banking sector as real estate prices have remained high. A sharp fall in real estate prices will hurt banks as debt repayment ability will likely weaken even for the rich," said Choi. "The best scenario will be for the government to announce measures that will trigger a gradual drop in real estate prices."
The credit card operations of banks are also likely to remain a drag, although the credit card sector should improve next year.
"Losses related to card operations were huge this year. Next year, they will break even or post a loss...not much help to banks' profitability," he said.
Choi also feels that Kookmin Bank's move to venture overseas may be premature.
Last month, Kookmin Bank and Singapore's Temasek Holdings jointly submitted a bid for a 51 percent stake in PT Bank Internasional Indonesia. Soon after, Kookmin Bank merged with unit Kookmin Credit Card.
"The bank needs to take a conservative approach to expand into other countries," said Choi. "It isn't creating sufficient profits at home now and it hasn't finished reorganizing its operations following the merger."
In June, S&P revised its outlook on the long-term rating on Kookmin Bank to negative from stable and affirmed its 'BBB+' long-term and 'A-2' short-term ratings.
S&P said it was concerned about Kookmin's credit to small and mid-size enterprises amid the economic downturn. The agency also mentioned the bank's weakened earnings prospects due to its fairly large exposure to card credit and its ability to manage these risks over the next few years.