South Korea Commercial Banking Report

Key Issues

In the last quarter, South Korea's economy has experienced high levels of inflation and slowing growth. The Bank of Korea is predicting further slowing of growth in the coming quarter but maintains that the economy is on the road to recovery. BMI is forecasting 5.2% expansion this year, an improvement on the 4.0% recorded in 2005 and slightly higher than the 5.0% projected by the finance ministry.

Since BMI's last quarterly report, South Korea's banks have witnessed healthy year-on-year (y-o-y)growth, reversing the pattern of decline we reported previously. The combined net profits of 18 major South Korean players has jumped 23.4% y-o-y for H106, according to the Financial Supervisory Service. The FSS reported that, 'Improving asset quality led to a drop in provisioning costs, while interest income sustained its upward momentum amid lending growth.'

All aspects of the commercial banks' balance sheets have been growing moderately to strongly. Bonds, in particular, have surged ahead, increasing to 21.5% of total assets (an increase of 14.8% in the past year) and leaving bonds holdings highly exposed. Loans growth has also proved strong, coming in at 10.9% and, as such, easily eclipsing a tame growth in deposits of 6.1% and a 9.7% growth in total assets.

Changes To This Quarter's Commercial Banking Forecast

We have made a number of improvements to the commercial banking reports this quarter. In particular, we have collated information about banks' capital and bond portfolios.

We have looked at capital primarily because we wanted to produce a clearer picture of the banks' balance sheets and, in particular, the liabilities side. We are now much better able to quantify liabilities that are not deposits.

We collated information about the bond portfolios because we wanted to gain additional insights about the risks with which the banks are involved. Across all the countries that we have surveyed, the commercial banks are major investors in government securities. In some instances, the banks are large holders of bonds - by any standard. In other instances, the banks' holdings of securities represent a very substantial portion of their total assets.