metrics to continue to improve for the coming 12 months, as the
authorities retain their conservative stance and guard against potential
"However, coming improvements to the Korean banking system's funding and
liquidity could be limited, as the banks already have sufficient funding,
and holding additional liquidity significantly above current levels would
result in downward pressure on profitability," says
Moody's Associate Analyst.
Lee was speaking on the release of a new Moody's report, entitled
"Funding and Liquidity Profile for Korean Banking System Remains Stable".
According to the Moody's report, commercial banks' KRW loan-to-deposit
ratio stabilized at 96.2% at
Further, the KRW liquidity ratio -- defined as KRW liquid assets due
within one month divided by KRW liquid liability due within one month --
climbed to a seven-quarter high of 132%, which suggests that banks are
well positioned to meet their short-term KRW liabilities.
Korean banks have also successfully shifted towards more deposit funding,
reducing their dependency on market funding.
"The proportion of low-cost deposits, defined as current and savings
deposits, in the banks' deposit base is also increasing, a trend that
will help keep down deposit costs and partially offset falling net
interest margins," says Lee.
Meanwhile, banks are taking advantage of favorable markets by refinancing,
at lower prices, the heavy issuance made during the global financial
crisis. This refinancing requirement will remain a key driver behind
their issuance in coming years.
Banks' foreign-currency loan-to-deposit ratios edged up slightly in Q1
2014, driven by their increased purchases of export and exchange bills
from exporters. Moody's expects ongoing export strength to fuel foreign
currency inflows and stabilize the ratio. However, Korean banks still
have foreign-currency loan-to-deposit ratios higher than their Asian
peers due to the presence of policy banks that rely mostly on market
Aside from strong foreign-currency deposit growth, banks are also
refinancing foreign-currency debt in longer maturities. Reflecting this
development, the system-wide portion of short-term foreign-currency debt
reduced to 16.8% of total foreign-currency debt at end-2013 from 50.1% at
Finally, Moody's notes that the banks' external liquidity buffers have
continued to strengthen. The five major commercial banks improved their
foreign-currency liquidity buffers by expanding committed credit lines
from foreign financial institutions, which hit another high in 2013.
The government has also increased its capacity to support foreign-currency
liquidity, in times of need, given its falling short term external
liabilities and increasing foreign currency reserves.
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