Gov’t ties to buoy Korea Development Bank's capitalisation

Problem loans are expected to rise, however.

Korea Development Bank’s (KDB) is expected to remain adequately capitalized with a supportive government even as its problem loans rise.

The bank will likely maintain good funding access, given its linkage with the government and policy role, Moody’s Ratings said in its latest ratings report of KDB, where it affirmed the bank’s Aa2 foreign currency and local currency long-term bank deposit ratings.

Moody's expects that the government's de facto guarantee of KDB's solvency will remain unchanged.

“The government may also provide a guarantee on KDB's foreign currency- denominated bonds during times of stress, as stipulated in the KDB Act. The bank's liquidity is modest because of its large holdings of illiquid securities, the result of debt restructuring, and shares held from in-kind capital injections from the government,” Moody’s Ratings said, adding that the Korean government will likely inject capital when needed to finance policy loans or funds that KDB operates.

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KDB’s problem loans to gross loans ratio is also likely to rise to the mid-1% range over the next 12-18 months. The ratio is currently at 1.23% as of 31 December 2023, primarily driven by weakness in the construction and housing sectors.

Net income (NI) to tangible assets (TA) ratio is forecasted to normalise below 0.5% through 2025, adjusting for one-off gains.

“The bank's profitability is generally more volatile compared with other commercial banks due to its large equity holdings and volatile impairment charges,” Moody’s Ratings stated