Fitch: Easing Korean Mortgage Regs to Aggravate High Debt Ratio

Tue Jun 24, 2014 9:53pm EDT

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(The following statement was released by the rating agency) SEOUL/SINGAPORE, June 24 (Fitch) Korean financial regulators are likely to follow through on suggestions by Deputy Prime Minister and Finance Minister nominee Choi Kyung-hwan to ease loan-to-value (LTV) and debt-to-income (DTI) ratio limits for mortgage lending, Fitch Ratings says. Easing regulatory lending limits will boost household credit and act as a positive catalyst for the property market in the short to medium term. However, raising LTV and DTI caps has the potential in the longer term to aggravate a household debt ratio which is already high, and worsen debt-servicing capabilities. Mortgage lending in Korea is currently capped with 50%-60% LTV and DTI ratio limits depending on geography - the tightest regulations are in Seoul, at 50% for both LTV and DTI ratios. There has yet to be any specific proposals as to what extent the limits will be relaxed, and whether it will be a targeted easing focusing on certain household segments and/or geographies. That said, political momentum toward boosting growth through de-regulation is building, and the Financial Supervisory Service Governor and the Financial Services Commission Chairman have expressed openness to reforming the current regulations. In the short to medium term, regulatory easing will boost household lending from the banking sector, especially toward the lower-income segment and self-employed individuals who have had limited access to bank borrowing (owing to the low DTI limit). From an asset-quality perspective, this should have a limited impact on the banking sector, at least in the short term. Many households are utilising non-bank financial institutions and unsecured personal loans to increase their real estate leverage, so enabling greater bank lending to these groups could mean that they are able to transition higher-interest-rate consumer borrowing to longer-term home mortgage borrowing from a bank. As a result, this could translate into improving household debt-servicing capabilities. Over the longer term, easing regulations could further strain household debt - a factor which we have highlighted as a risk to the country's sovereign position. Korea's household debt/disposable income ratio already exceeds 160%, far in excess of other advanced economies. Economic growth is forecast to remain subdued relative to its long-term average, so this suggests that the potential for Korea to significantly expand its household credit without raising risks to asset quality is limited. Contacts: Heakyu Chang Director Financial Institutions +822 3278 2686 Fitch Ratings Korea 9F Kyobo Securities Building 26-4 Youido-Dong, Yongdeungpo-Gu Seoul, South Korea Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Operating Environment for South Korea's Banks - Performance to Remain Under Pressure; Ratings Stable here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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