Korean banks resilient to high household debt: Moody's

Korean banks are resilient to the country's heavy household debt, as they have a solid capital buffer against possible debt defaults, Moody's Investors Service said Thursday.

Heavy household debt has often been cited as one of the major concerns for the Korean economy, which could pose a serious threat to the already slowing economy.

"One reason for this resilience is that the loan portfolios of Korean banks, which account for about half of the household credit in the system, have structurally superior asset quality compared with non-bank lenders," said Park Hyun-hee, an analyst at Moody's.

"Their mortgage portfolios have lower loan-to-value ratios, and they tend to lend only to households with above-average income and credit quality."

The global credit appraiser said it has earlier conducted stress tests on 16 South Korean banks.

The test results suggested that the banks' financial strength will not significantly be shaken, it said.

The credit rating agency, however, showed concerns regarding the structural challenges posed by the high levels of household debt, which creates the potential for shocks that may not be entirely captured by stresses based on Korea's historical experience.

Moody's said the high proportion of non-amortizing, short-dated mortgages could increase the risk of refinancing shocks as the loans mature.

Korea's rapidly aging demographics has also created a risk that housing prices could be set for a material decline in coming years, it added.

"We continue to view Korea's high household debt as a credit negative. While we do not anticipate a trigger in the next 12 to 18 months that would pressure the banks' asset quality, Korea's household debt levels will pose significant tail risks for the financial system," said Park.

As of end-June, Korea's household debt reached a record 922 trillion won ($829.5 billion), or 74 percent of the country's gross domestic product in 2011. Home-backed loans accounted for more than 40 percent of the total, which is estimated to top 1,000 trillion won if debts owed by the hard-to-track self-employed are included. (Yonhap)