Korea’s Kyongnam Bank face rising loan risks from SMEs, real estate financing: analyst

Profitability is expected to decline slightly, but it should maintain sufficient capital buffer.

South Korea’ Kyongnam Bank will see its asset quality weaken over the next 12 to 18 months due to weakening loans, but should maintain a sufficient capital buffer and strong funding profile.

“High interest rates and an economic slowdown continue to weigh on borrowers’ capacity to repay principal interest,” Moody’s Investors Service wrote in a report.

Moody's also sees rising credit risks in loans to SMEs and real estate project financing (PF) loans, which comprised close to half and mid-single digit percentages of the bank's total assets, respectively.

Profitability will also decline slightly through 2024, with net interest margin possibly falling to around 2% in 2023 from 2.1% in 2022. This is because the lending rate has peaked, whereas funding costs will remain high due to elevated time deposits mix, Moody’s said.

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Overall, Kyongnam Bank's credit costs will remain largely stable at the current level of 0.42%. Moody’s based this off the bank has high loan loss reserves compared to its non-performing loans of 213% as of 31 March this year.

Capitalization will likely remain modest, underpinned by its slower mid-single-digit loan growth. Kyongnam should also maintain a good funding structure and modest liquidity over the next 12-18 months thanks to its diversified and granular deposit base.

However, Moody’s also noted that the bank's liquidity is weaker than that of its domestic peers, with Moody's-calculated liquidity ratio at 14.6% as of 31 March.

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Kyongnam Bank also enjoys a very high level of affiliate support from the BNK Financial Group, which fully owns the bank.