INTERVIEW: Woori Finance CFO: Heavy Household Debt Is Biggest Risk Ahead

South Korea's banking system is more likely to be imperilled by heavy household debt over the next year than any potential difficulty in foreign currency liquidity, as an ailing property market and the euro zone crisis trigger the possibility of an increase in loan defaults, a top official at Woori Finance Holdings (053000.SE), the nation's largest financial services firm, said.

While the euro zone debt crisis is likely to hit the local economy harder in coming months as it squeezes the earnings of Korean companies and thereby banks, the direct impact on banks' foreign currency liquidity has been limited as local lenders borrowed from overseas when external conditions were better and they also have strong credit ratings, Woori Finance Holdings Chief Financial Officer Jung Hyun-jin told Dow Jones Newswires in a recent interview.

"The risk we should care about most in the (12-month span) is household debt, not foreign currency liquidity anymore," Mr. Jung said. "It's huge in size. Out of the total volume of nearly 1,000 trillion won ($879.2 billion), Woori has around KRW70 trillion."

The nation's household debt stood at KRW857.8 trillion as of the end of March. The government has been trying to slow the pace of such debt at commercial banks, discourage credit card usage and find low-credit borrowers better interest conditions. Still, more should be done, he said.

The delinquency rate of loans extended to households rose to 0.97% in May, according to the financial watchdog data. That is low compared to countries such as the U.S., where the rate is nearly 9%, but it is South Korea's highest since October 2006's 1.07%.

A large chunk of these loans have been taken by people to buy homes. However, the local property market has been in a slump since the financial crisis in 2008 and as transactions dry up, it could lead to further deterioration in the financial health of Korean households as they find it hard to find buyers for their houses, raising the risk of default as they are unable to pay back their loans.

"A house is the only asset for most Koreans. They buy houses by getting loans from banks. They pay interest only for a long time as they can't pay back the principal until they sell the house. Now, transactions in the domestic property market have dried up and if continued ahead, it will eat into banks' capital by boosting non-performing loans and delinquency rate," Mr. Jung said.

While South Korea has often seen its banking system reel from corporate loans gone sour, there have been few instances of banks facing similar problems from household debt. One of the rare exceptions was the so-called credit card crisis back in 2003.

After the 1997-1998 Asian financial crisis, the government lowered the bar for qualification for credit card holders to shore up the economy, prompting excessive use of credit. The crisis resulted in the then-largest player LG Card being bailed out twice with billions of dollars, banks absorbing their then-independent credit card units, and taking on bad debt.

The financial authorities' recent push on banks to make more use of the so-called pre-workout programs, which was introduced in 2008 and designed for people who could default on their loans, is a good try, he said.

The details of the program vary among banks as they are allowed to determine which instruments they want to use, but one common path is offering potential defaulters lower interest rates and a longer repayment period to clear their loans.

"We could help potential bad debtors by extending the loan expiry to 20-year or 30-year span so that they could pay back better. I personally think this issue is really serious and should be quickly addressed," Mr. Jung said, suggesting state-run firms like Korea Housing Finance Corp. step in to buy houses for potential bad debtors.

"Loan delinquency rate is on the rise now (in the wake of the euro zone crisis)," he said, adding that the crisis will have an impact on the real economy even though its full brunt hasn't been felt yet.

The euro zone's debt woes have also renewed focus on whether Korean banks have sufficient foreign currency liquidity to cover their overseas debt coming due, especially since they faced a tough time borrowing overseas during the global credit crunch.

Mr. Jung said that Woori Finance has been holding $2 billion to $3 billion in extra foreign cash for an emergency so that it can pay back its overseas debt immediately, if it isn't rolled over.

Woori Finance has $9 billion in foreign-currency deposits, mainly held by its flagship unit Woori Bank, around $7 billion in interbank loans, offshore bonds worth $6 billion in terms of outstanding amount.

The euro zone debt crisis has also not affected the group's overseas funding plans yet, neither has it derailed its merger and acquisition plans as it looks for expansion to Asia where economic conditions are relatively better than the rest of the world.

He forecast the dollar/won to move downwards to 1,100 level by the end of the year. The pair ended at 1,135 Thursday in Seoul.

Write to Kanga Kong at kanga.kong@dowjones.com

Copyright ? 2012 Dow Jones Newswires

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