Korean Banks Brace for Trouble

But Remain Healthier Than US Lenders By Kim Jae-kyoung Staff Reporter Major Korean banks are braced for trouble amid the global financial crisis ― but they are in better shape than their American and European counterparts. Local banks reported their balance sheets turned into the red in the fourth quarter of last year, but they posted profits last year and their financial health, although deteriorating, is within a manageable and tolerable range, according to many analysts. A warning has been issued that local banks will undergo another round of credit crunch difficulties due to problems in overseas funding. Foreign investors have recently offloaded their bank shares, while Moody's Investors Service lowered ratings for local lenders. However, the latest data suggests that Korean banks are much more resilient than their peers in the United States and the United Kingdom, the epicenter of the ongoing credit crisis. Korean lenders have a much better footing, both in terms of financial health and profitability. Although some lenders posted losses in the last quarter, all the major Korean banks made profits last year. In particular, Shinhan and Kookmin recorded operating profits of 1.91 trillion and 1.81 trillion won, respectively. This is in stark contrast to the fact that major banks in the United States and Europe suffered from astronomical amounts of losses. Citigroup posted 11.6 trillion won in losses in the fourth quarter alone, while Deutsche Bank and Royal Bank of Scotland registered 6.9 trillion and 56 trillion won, respectively. ``We have seen an increasing credit risk from (Korea's) small- and medium-sized enterprises (SMEs) and construction companies. The credit risk will continue in 2009,'' Kwon Jae-min, the Hong Kong-based S&P director responsible for Korean banks' ratings, said in a recent interview. ``However, the current level of deterioration of banks' financial standing is still in line with our expectations and within the buffer for respective ratings level,'' he added, ruling out the possibility of any immediate rating review. According to the Financial Supervisory Service (FSS), the average return on assets (ROA) for Korean banks stood at 0.7 percent in September, compared to the United States (0.44 percent), Japan (0.58 percent) and Germany (0.32 percent). ROA is a key barometer for banks' profitability. The non-performing loan ratio for local lenders, an indicator of financial soundness, averaged 0.7 percent in September, well below the 2.2 percent for U.S. commercial banks. Even if fourth-quarter data is factored in, the figure is likely to stay around 1 percent. The overdue loan rate is also considered within a manageable range. In January, the average overdue rate for Korean banks stood at 1.08 percent, compared to the U.S. lenders' 3.64 percent. Market experts said that although Korean lenders are exposed to a rising credit risk associated with smaller firms and individuals, chances are slim that they will follow in the footstep of ill-fated U.S. and U.K lenders. Local banks have set aside sufficient loan-loss provisions, with their combined loan-loss coverage ratio reaching 175.1 percent in September, well above the U.S. banks' 88.7 percent, meaning that Korean banks have much better capability to cushion the blow. Nonetheless, the outlook for Korean banks looks gloomier than ever. The latest data indicates that the worst is not behind them. Even tougher challenges are lying ahead as the deepening slump has forced more borrowers to fall off the edge. The financial health of local lenders is deteriorating at a rapid pace, with their overdue loan rates continuing on an upward trend. The problem is that this trend will likely persist at least for this year, putting further constraints on the faltering economy. ``Regardless of what banks have done, the overdue rate has kept rising and the trend will continue. The current level itself it not worrisome, but the problem is that there are many firms and individuals on the borderline of bankruptcy,'' a local financial group chief financial officer (CFO) told The Korea Times, requesting anonymity. ```I think quite a few small firms will become insolvent in the first half, which will in turn affect households in the latter half. Many like to believe that we have seen the bottom in the last quarter,'' he added. ``However, the worst has yet to come. I think this year will be the worst for the Korean lenders ― unless employment conditions turn around anytime soon.'' kjk@koreatimes.co.kr