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.