Published : Jan. 28, 2016 - 11:23
Korean banks' excessive dependence on loans for profit could pose a serious risk to the banking sector should a sudden rate hike force households to default on their debts, a report said Thursday.
As of the end of 2014, the ratio of outstanding loans held by local lenders to their total assets came to 73.8 percent, up from 72 percent in 2012 and 67.7 percent in 2008, according to the report from Hana Institute of Finance, a private think tank run by Hana Financial Group.
Hana Financial Group building in Seoul (Yonhap)
The steady increase is in contrast with a move by lenders in Japan and the United States, who instead lowered their loan-to-asset ratio while boosting their investment in securities, apparently in the face of low interest rates, the report said.
U.S. banks, for instance, expanded their investment in securities from 26.4 percent of total assets in 2005 to 31.8 percent in 2014 as the U.S. Federal Reserve kept its key policy rate at near zero percent since December 2008, also lowering the banks' own lending rates.
Japanese lenders too have expanded their stock investment to about 40 percent of their assets in 2014 from around 20 percent in the mid 1990s, it noted.
South Korean banks, on the other hand, have only increased their security holdings by an annual average of 3.1 percent between 2001 and 2014 while their lending surged by an average 8.9 percent over the cited period.
What could have been deemed a risk-free investment in lending has apparently offered little yield in return.
The local banks' total assets only increased 1.7 percent from a year earlier in 2014, following a 2.5-percent rise in 2012 and 1.5 percent in 2010, the report said.
The banks' profitability is further deteriorating as the South Korean central bank has kept its key policy rate frozen at a record low of 1.5 percent over the past seven months.
According to an earlier report from the Financial Supervisory Service, the local lenders' net interest margin, a key gauge of profitability, dropped to a record low of 1.56 percent in the third quarter.
Amid feverish lending by local banks, the country's household debts are reaching record highs monthly, which the report notes could create a problem that could shake the very foundation of the entire banking system, should any significant part of the outstanding loans go bad.
"While looking for a more effective way of managing their assets, local banks need to become more flexible and study those of major global banks," it said. "They will also need to explore new investment opportunities with moderate risks and moderate returns instead of focusing only on loans." (Yonhap)