Banks buoyed as credit ratings rise

Global agencies are raising the credit ratings of Korean lenders as they downgrade those of bigger foreign banks due to the euro zone crisis and the anemic U.S. recovery.

The agencies said their positive outlook on Korean banks stemmed from a reassessment of the quality of government support by applying newly revised criteria, as well as the presence of strong capitalization and solid franchises in some cases.

However, experts say it remains to be seen whether this is a temporary development or whether local banks will be able to take advantage of the current financial uncertainty to close the gap with their foreign counterparts.

Earlier this month, Standard & Poor’s raised the credit ratings of Shinhan Bank and Hana Bank by one level from A- to A.

Meanwhile, in September and November, Fitch raised the ratings outlook of five Korean commercial and state-run banks, from negative to stable in some cases, and from stable to positive in others.

On the other hand, mainstay banks from advanced nations have taken a sound beating recently as S&P lowered the credit ratings of 37 U.S., European and Japanese banks in November alone.

Part of the reason for the rise in Korean banks’ ratings is that they have some of the lowest exposures to foreign currency debt from Europe in Asia. And as Europe has burrowed deeper into uncertain territory in recent months, local lenders have further insulated themselves from risk in the second half of the year by seeing their debt from European banks drop.

The Financial Supervisory Service announced yesterday that among domestic commercial banks’ foreign currency debt, the amount coming from European banks or institutions fell from 36 percent in June to 34.1 percent at the end of October. Moreover, some $28.8 billion, or 66 percent, of the foreign currency debt from European banks came in the form of bonds. In these cases, the European banks oversaw the issuing process rather than lending the money themselves.

“If we were to look at actual investors, we expect the amount of foreign currency debt from European sources would fall drastically below the 34.1 percent tallied,” said one FSS official.

However, experts caution against too much optimism, saying that the positive outlook on Korea’s banking sector is dependent on temporary factors, such as the recent upgrade of Korea’s sovereign credit rating and rising profits at some commercial banks.

“It is difficult to say whether the rise in domestic banks’ credit ratings will be a lasting trend,” said Woo Hee-sung, a research fellow at the Korea Center for International Finance.

By Lee Jung-yoon [joyce@joongang.co.kr]