Banks on alert as govt. clamps down on mortgage loans

Local banks are on alert as the government tightens the screw on mortgage loans that has contributed to their profits, financial industry insiders said Monday.

The Moon Jae-in administration took a series of steps since taking office in May to tame real estate speculation. It placed nearly all major cities under heavy watch for speculative transactions and limited available loans using homes as collateral while linking such loans more strictly to borrowers' ability to repay. The Moon government also sent a message to the banks against raising the spread of outstanding loans, telling bank chiefs last week not to do so without due reason, pre-empting them as the central bank is hinting at a possible rate hike.

Mortgage loans make up a large part of business by commercial banks.  According to the Financial Statistics Information System operated by the Financial Supervisory Service, the proportion of home-backed lending by six commercial banks averaged at 40 percent last year, up from 35 percent in 2011 as the real estate market flourished.

At Woori Bank, the rate was 42.01 percent according to its third-quarter earnings report.  For Kookmin Bank, it was 41.96 percent.

Insiders say when the effects of government measures start to kick in, the banks' lending will fall, which will bring down their profit from interest earnings.

"The growth rate of loans is bound to be stunted from government actions," Choi Jung-wook of Daishin Securities said. "Banks are trying to make up for it by increasing corporate loans to small and medium-sized businesses, but this could increase pressure for losses from bad loans."

Insiders say the banks also have to worry about the government raising the bar for the capital adequacy ratio for mortgage loans. The current local practice is to apply only one-third of weighted risk to mortgage loans compared to corporate loans when measuring the capital adequacy ratio. 

Such a practice makes it more profitable and practical for banks to make more mortgage lendings over corporate loans, lessening the burden to keep money in reserve. Any tinkering with weighted risk and required reserve would cut the banks' profits.

"The government is demanding comprehensive and productive financing from the banks, such as lowering the interest rate on delinquent loans and reduction of financing costs for people with good credit," Choi said. "It's likely that social values will outweigh profits for banks for some time to come."  (Yonhap)