Bond Yields Fall, Household Loans Decrease... Banks' Surplus Funds Soar

Liquidity Indicators (LCR) of Four Major Banks Exceed 100%
Bond Market Stabilizes, Household Repayments Increase, Financial Cushion Expands

[Asia Economy Reporter Shim Nayoung] As the bond market stabilizes and banks' household loans decrease, banks' liquidity conditions are improving. The atmosphere has now returned to the state before last year's Legoland incident.

According to the four major banks (KB Kookmin, Shinhan, Hana, Woori) on the 13th, the Liquidity Coverage Ratio (LCR) for January this year all exceeded the 100% mark by a wide margin. The LCR is a liquidity indicator that shows the ratio of highly liquid assets such as deposits and government bonds compared to the bank's net cash outflows over 30 days. The higher this figure, the more abundant the bank's surplus funds are.

As of the end of January, the LCRs were 101.88% for Bank A, 102.64% for Bank B, 108.91% for Bank C, and 102.7% for Bank D. Last November, due to financial authorities' controls that blocked bank bond issuance and measures to lower deposit and savings interest rates, the LCR had fallen to the 90% range but has since recovered rapidly.

Less Outflow, More Inflow

The banking sector cites the stabilization of the bond market and the decrease in household loan balances as the main reasons for the rapid recovery of the LCR. A representative from a commercial bank said, "As bond yields have declined more clearly this year, the need to inject additional funds into the bond market stabilization fund and securities market stabilization fund that banks had established has decreased," adding, "This investment fund, amounting to tens of trillions of won, has been converted into banks' surplus funds."

According to the Bank of Korea, bond market yields have been steadily decreasing. The corporate bond (3 years, AA-) yield fell from 5.48% at the end of November to 4.31% at the end of January. During the same period, bank bond (3 months) yields dropped from 4.07% to 3.47%, and CD (91-day) yields decreased from 4.03% to 3.46%. The Bank of Korea explained, "Due to the effects of market stabilization measures, credit risk concerns have eased, leading to a sharp decline."

The increase in household loan repayments also pushed up banks' LCR. Another commercial bank official said, "Customers feeling burdened by loan interest rates are significantly repaying loans, mainly credit loans, so the inflow of funds into banks is increasing." The Financial Services Commission also announced that the total household loan balance across the financial sector decreased by 8 trillion won in January. In particular, the decrease in credit loan balances reached 7.4 trillion won, and mortgage loans also declined by 600 billion won.

Bank Bond Issuance and Deposit Interest Rates Stall... Deterioration of Soundness Remains a Concern

As banks' liquidity conditions improve with "less outflow and more inflow," the issuance of bank bonds and competition to attract deposits and savings seem to have slowed. Banks do not feel the need to incur costs to raise funds. Bank bond issuance, which soared to 20.53 trillion won in October last year, fell to 14.02 trillion won in December and further dropped to 9.91 trillion won in January this year. The interest rates on commercial banks' time deposits, which had hovered around 5%, settled in the 3% range starting last month.

Although banks' liquidity has improved, the deterioration of asset quality is a concern. The average delinquency rate on personal business loans at the five major banks (as of December last year) was 0.24% in December, up 0.06 percentage points from 0.18% in September last year. For small and medium-sized enterprises, it was 0.28%, up 0.05 percentage points during the same period. The average delinquency rate on household loans rose 0.03 percentage points to 0.19%. Mortgage loan delinquency rates increased from 0.12% to 0.15%, and credit loan delinquency rates rose from 0.24% to 0.28%, respectively.

A financial sector official said, "Although the delinquency rate level itself is low, the upward trend is clear," adding, "If delinquency rates rise further, there is a high possibility that banks will face additional provisioning issues, which could also affect the LCR."