Steady margins will push Daegu Bank to stable profits in 2023

The bank’s dividend payouts will remain at current levels of 40% to 50%, Moody’s reported.

Daegu Bank’s credit profile is expected to remain resilient over the next 12-18 months despite the challenging operating environment in Daegu City and Gyeongbuk Province, says Moody’s Investors Service.

The ratings agency expects Daegu Bank's profitability will remain stable, driven by steady net interest margin. The bank’s capitalization is also sighted to modestly improve over the next 12-18 months, underpinned by slower loan growth, with elevated interest rates weighing on loan demand. 

Its dividend payouts will also likely remain at current levels of 40% to 50%

“Stabilized market rates will lead to lower funding costs than in late 2022 when the domestic bond market tightened and banks raised time deposit rates to secure liquidity,” Moody’s added.

“A decreasing local population and structural decline in key manufacturing industries such as textile and auto parts have led to a rising number of unsold housing units, which in turn raises asset quality risks related to the bank's project financing (PF) loans and guarantees,” the ratings agency said in a commentary.

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Moody’s noted, however, that risks are mitigated by the loans' small exposure, at only 6%.

Borrowers' debt repayment capacities will be under pressure from elevated interest rates, leading to higher credit costs for Daegu Bank. However, Moody's said that this will be partially offset by an improvement in the bank's cost-to-income ratio after its large-scale organizational restructuring in 2021.

Daegu Bank also has a sufficient loss buffer with 99.5% of its PF loan in senior tranche. The bank also holds guarantees from the Korea Housing & Urban Guarantee Corporation. More than 70% of the bank's corporate loans are covered by guarantees and collateral.

Deposit growth is supported by higher deposit rates and capital outflow from risky assets into lower-risk bank deposits.

“Moody's expects [Daegu Bank’s] liquidity and funding to improve as the bank regulator reinstates the loan-to-deposit ratio and liquidity coverage ratio to pre-COVID levels,” the ratings agency said in the commentary.