News Column

Moody's: Korean banking system's funding and liquidity profile remains stable

August 24, 2014

Moody's Investors Service says that it expects the Korean banking system's funding structure and liquidity

metrics to continue to improve for the coming 12 months, as the

authorities retain their conservative stance and guard against potential

liquidity shocks.

"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 Jeffrey Lee, a

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 end-March 2014, below the regulator's cap of


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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Source: EMBIN (Emerging Markets Business Information News)

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