Busan Bank’s earnings to decline in medium term: Moody’s

Profits will decline due to a modest narrowing of net interest margins to 2% in 2023.

Profits of South Korean regional bank, Busan Bank, are predicted to fall in the coming year or so, Moody’s reported.

In the next 12-18 months, Busan Bank’s earnings will decline due to a modest narrowing of net interest margins to 2% in 2023 from 2.19% in 2022. 

Lending rates have peaked, and funding costs will remain high because of a more significant proportion of time deposits.

Cost efficiency is expected to improve through the bank's ongoing efforts to optimise its branch network.

Busan Bank's capitalisation is predicted to remain strong, supported by mid-single-digit loan growth. 

Despite its high tangible common equity to risk-weighted assets (TCE/RWA) ratio (over 15% since 2020), Moody's considers potential capital needs within the parent BNK Financial Group due to its high double leverage ratio (131% as of 31 March). 

The bank's dividend payout ratio will stay around 50%.

Additionally, the bank's funding structure is expected to remain robust, thanks to its solid banking franchise in its home region and diverse deposit base.

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However, its liquidity is weaker than its peers, with the Moody's-calculated liquidity ratio declining to 12.5% as of 31 March, from 14.9% at the end of 2021, primarily due to strong loan growth of 9% in 2022. 

The loan-to-deposit ratio remained high at nearly 100% as of 31 March. 

The bank's liquid assets consist mainly of government and public agency bonds with low market risks, given their average duration below 2.5 years.

Considering Busan Bank's systemic importance in Busan City and Gyeongnam Province and the Korean government's history of assisting distressed commercial banks, Moody's assesses a very high level of support from the Korean government.