(Bloomberg) --
South Korean bank stocks have gone from cheap to extremely cheap in a matter of months as concerns grow over their loan books tied to the nation’s flagging property sector.
The MSCI Korea Financials Index, in which banks carry a 65% weighting, is trading at 0.34 times its members’ book value, down from about 0.5 times at the end of 2019, according to Bloomberg-compiled data. It shows investors are pricing banks’ assets at a third of their stated worth, the lowest among Asian financials and cheaper than even Japanese banks that have been struggling with rock-bottom interest rates after decades of deflation.
Investors are concerned that Korean banks are ill-prepared for a potential bursting of a housing bubble and collapse of companies that are being propped up by lending. Seo Young-soo, a Seoul-based analyst at Kiwoom Securities Co. who correctly predicted the nation’s 2003 credit card crisis when 4 million cardholders defaulted, says the coronavirus crisis is hurting the export-driven economy and may lead to a downturn in the housing market.
“Korea is one of the countries with fast-growing household debts, and the bubble in properties is more serious than in other countries,” Seo said. Meanwhile, “there are so many zombie companies in the country. If exports are getting worse in May, those firms may not be able to survive.”
Risks are rising in Korea’s household and corporate debt because both are heavily linked to the property market. Corporate loans made since the Asian financial crisis have centered on small and medium-sized firms, and banks took their properties as collateral, according to Lee Soonho, research fellow at Korea Institute of Finance.
“Korean banks haven’t accumulated enough loan-loss reserve while the risk of defaults at companies is rising because of Covid-19,” said Choi Kwangwook, chief investment officer at J&J Investments.
Provisions set aside by Korean banks to cover potential loan losses make up 0.47% of their total loan book, compared with 1.39% for U.S. lenders, according to Kiwoom Securities. The Korean government has unveiled a 58.3 trillion won ($47 billion) rescue package to virus-hit companies while also asking state-run and private banks to support them, Kiwoom Securities’ Seo said.
Korea’s exports fell in April by the most since the global financial crisis and job losses surged to the highest since 1999. The Bank of Korea lowered interest rates by 50 basis points in March to a record 0.75% and is expected to cut again on Thursday. As a result, banks may face a further decline in net interest margins.
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South Korea’s $1.3 billion household debt accounts for 95.5% of its gross domestic product, one of the highest in the world, according to data from Bank for International Settlements.
Household debt in Korea is particularly risky because about half is in so-called bullet loans, with the bulk of the payment due at maturity, according to an April report from the International Monetary Fund. Household balance sheets are vulnerable to real estate price fluctuations, the IMF said.
Residential property prices in Korea gained just 0.1% in May from April, the least since September 2019.
“Honestly, there’s a bubble in Korea’s property market,” J&J Investments’ Choi said. “The Asian financial crisis and the 2008 global financial crisis were caused by problems at corporations. But the next crisis may come from household debts linked to the housing market.”
©2020 Bloomberg L.P.
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