RETAIL BANKING | Cesar Tordesillas, Korea

S. Korea's banks to suffer setbacks, says Moody's

Household debts and a corporate slowdown.

These were the culprits identified by Moody's that would cause South Korea's banking sector to suffer setbacks

in performance in the next few quarters.

"The operating environment for Korean banks will be weakened over the next 4-6 quarters as the industry faces a high level of household debts, falling property prices in metropolitan towns and a slowdown in construction and shipbuilding," said Choi Young-gil, the vice president and senior credit officer at Moody's.

South Korea has been grappling with high household indebtedness, which hit a record 922 trillion won or US$846.1 billion as of the end of September.

South Korean Banks' earnings were down by 39.2 percent on-year to 7.5 trillion won in the first nine months of the year.

In 2011, local lenders logged a record yearly profit of 14.9 trillion won.

While noting that the overall outlook for the local banking system remains stable, Choi pointed out that banks can face a credit rating downgrade if conditions worsen.

"(If they show) net losses for two quarters, a bad debt ratio above 3 percent or a capital ratio falling below 10 percent, we will take actions," he added.

Currently, the non-performing loan ratio for banks here stands at an average 1.5 percent with the capital adequacy ratio at 11 percent.

Thomas Byrne, a Moody's senior vice president and regional credit officer, said, "(The country's) ratings outlook hinges on containing banks' funding vulnerability and contingent fiscal liabilities," adding the nation's outlook remains stable.

Moody's upgraded the sovereign rating on South Korea by one notch to "Aa3" in August, the fourth highest on the chart, citing strong fiscal fundamentals.

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