Korean banks' liquidity and funding scores remain weak compared to Asian peers: Moody's

Blame it on their higher reliance on market funding.

Moody's Investors Service says that Korean Won (KRW) liquidity and funding conditions for banks in Korea remain stable, supported by the central bank's accommodative monetary stance.

"While the banks have extended more loans over the past few years, the impact on their liquidity has been offset by continued growth in low cost deposits amid the prolonged low interest environment," says Jeffrey Lee, a Moody's Associate Analyst.

"But although improved, the Korean banks' liquidity and funding scores remain weak when compared to other Asian peers, due to the system's higher loan-to-deposit ratio and higher reliance on market funding," adds Lee.

Here's more:

The Moody's report notes that Korea's banking system continues to boast a liquid balance sheet, partly driven by ongoing tightening of the regulatory floor imposed on the KRW liquidity coverage ratio. This ratio rose among the major commercial banks in Q1 2016, but declined among the regional banks.

The KRW loan-to-deposit ratio (LDR) of 98.0% for Korea's commercial banks at end-March 2016 was largely unchanged from 2015 and 2014, and below the regulatory ceiling of 100%.

The system's foreign currency (FC) liquidity also continued to improve, thanks to strong deposit inflows from corporates and institutional investors, reflecting the country's widening balance of payments surplus. Specifically, the FC LDR for commercial banks improved to 124.6% at end-March 2016 from 158.5% at end-2014, while the system-wide FC liquidity ratio improved to 111.3% at end-March 2016, well above the regulatory guidance of 85%.

Moody's expects this improving trend to continue in the next 12-18 months, on the back of the Financial Services Commission's announcement on 16 June 2016 that Korea's commercial banks will need to meet a minimum liquidity coverage ratio of 60% by 2017, and of 80% by 2019.

The commercial banks' FC funding structure also strengthened further, supported by an increase in the share of FC deposit funding to total FC funding to 49% at end-March 2016 from 44% at end-2014.

Nevertheless, the liquidity and funding profiles of Korean banks remain weaker than those of Asian peers. In that context, the presence of policy banks in Korea, which do not have deposit franchises due to their policy mandates, further adds to the system's reliance on market funding.