Korea Banks:Oct17HH debt measures fall within expectations

Gov’t finally announces comprehensive HH debt measures after 2month delayAfter delaying the announcement since August 2017, the government finally put out‘Comprehensive Household Debt Measures’ on 24October. The plan was largely inlinewith our expectation, mostly involving tighter underwriting guidelines to limitexcessive leverage for speculative property investments, especially targeting multihomeownersand secondary lending institutions. While more detailed guidelines willbe announced before the year-end, the direction is in-line with our expectation (i.e.,delinquent lending rate/ DTI/ DSR scheme, and writing off small/long-overdue loans).

    With the announcement, regulatory concerns likely to ease in our viewWe expect mortgage loan growth to decelerate from 11% y-o-y in 2014-16to a subdued4% in 2018e-19e. However, it is well understood that Korean banks are not aggressivelylooking to grow their loan book especially in the household segment. Other measuressuch as cutting the lending rate on delinquent loans and raising LDR weights for HHloans will have limited impact, sub 1% of annual earnings. Lastly, we flag that householddebt is unlikely to pose significant systematic risk given that: 1) mortgage structureimproved with much higher fixed-rate and amortizing proportion; 2) majority of householddebt is held by higher income households; 3) financial debt to asset ratio remains stable;

    and 4) debt to disposable income appears overstated given a high portion of selfemployment.We think today’s announcement brings increased clarity and will help toease the regulatory risk. See our 18October report Korea Banks – 3Q17preview: Solidearnings should continue for our investment thesis and preferred plays.