20080722-Mirae Asset-Korea Banking

Loan Growth Prospects for 2H08
Higher-than-expected loan growth in 1H08
For 1H08, domestic banks logged a dramatic loan growth of 8.0% HoH,
beyond market expectations and their internal guidance levels. Main reasons
behind the high loan growth are: 1) both supply from lenders and demand from
borrowers was concentrated in 1H08 prior to the actual economic downturn
forecast for 2H08; 2) branches strategically expanded loans to counter
sluggish equity-type fund sales in order to meet targets allocated by HQs; 3)
lending to large companies increased dramatically; and 4) banks felt less
apprehensive in providing loans thanks to a surge in special offer deposit
product sales and bank debenture issuance in the beginning of the year.
Loan growth to slow significantly in 2H08 due to…
We project loan growth for 2H08 at roughly 3-4% and for the full FY08 at
approximately 12-13%.
… 1) government’s austerity stance and …
The government is expected to reduce liquidity in the market as it has shifted
its economic policy stance toward stabilizing consumer prices. As such, the
government is likely to selectively adopt austerity measures such as target call
rate hikes, payment reserves increases, and reduction of the low interest rate
BOK refinancing limit. Aside from the aforementioned BOK policies, the
government is anticipated to have regulators monitor competition amongst
banks closer, examine lending credit risk management, and intensify loan
screening to large companies for M&A activity.
… 2) a business environment unfavorable to loan growth
Banks should also not be able to afford to sustain the lofty loan growth into
2H08, given: 1) that they should beef up protection of NIM (which had plunged
in 1H08); 2) that they should improve asset soundness in preparation against
the potential for continued slowdown in the economy in 2H08; 3) that tough
funding conditions are expected in 2H08; and 4) that most banks aim to selfmoderate
loan growth at their branches. The banks did not regulate their
branches’ aggressive lending expansion as long as the loans were within the
annual target range in 1H08, but are anticipated to aggressively control the
growth in 2H08.
Slowing loan growth is currently viewed as a positive
Slowing asset growth, which is seemingly negative, is viewed as positive
under current business circumstances as the loan growth deceleration will be
conducive to NIM protection and keep credit risk from growing further.
However, there remains the possibility that mortgage loans will grow above the
expected range in the event that the government eases regulations on real
estate in an attempt to resuscitate the currently sluggish housing market.