Boston, MA -- (SBWIRE) -- 09/24/2012 -- Structural Change Bodes Well For Sector BMI View: South Korean banks appear to be going through a fundamental change in their external debt profiles, having increased sharply their holdings of long-term external borrowings in order to repay and reduce their reliance of short-term debt. Liquidity conditions have also been improving since the 2008/09 crisis. While earnings are expected to slide in 2012, adequate capitalisation and improving liquidity conditions will help to buffer banks against a short-term downturn. Following on from our recent article on the threat posed by the recent surge in South Korea's external debt levels(see, '"Hidden" Debt A Growing Risk', March 14), we now assess the state of the banking sector's foreign borrowings. Subsequently, we present our take on why we expect banking profits to decline in 2012. Structural Change. Overseas debt owned by South Korean banks accounted for roughly half of all external South Korean debt in 2011, down markedly from the levels seen prior to the financial crisis circa 2008/09. Structurally, the dynamics in banking sector debt appear to be shifting. A rebound in debt taken on by domestic banks has been accompanied by a fall in the debt levels of foreign banks. More pertinently, banks on aggregate have been turning towards long-term sources of funding and scaling back on short-term borrowings. The impetus likely came as banks sought to secure longer-term borrowings to buffer against the uncertainty in the global economy. The government's efforts to curb foreign-currency borrowings through a levy on banks' short-term debt holdings also likely played a role. South Korea Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 31 According to the Financial Supervisory Services, the long-term rollover rate - measuring the percentage of fresh offshore borrowings against foreign debt that mature beyond a year - while falling from approximately 380% in January, still came in considerably stronger at 268% in February. The short-term rollover rate, on the flip side, fell from 90% to 65% in the same period, meaning that banks were borrowing long-term to pay off shorter-term debt. The current ratio - measuring short-term assets against short-term liabilities - in both Won and foreign currency terms have been on the uptrend in the past two years, suggesting that banking liquidity, especially in foreign currency, has been improving. A Positive Conclusion. On aggregate, while the overall level of foreign debt has been rising in recent years, we believe the structural shift towards a decreasing reliance on short-term funding is on aggregate a positive for the economy. Such a move reduces the odds of a severe liquidity crunch stemming from sudden foreign capital outflows in the event of another crisis. A heavy reliance on short-term offshore debt had detrimental effects during the Asian Financial Crisis and the recent Global Financial Crisis as capital outflow destabilised the domestic c

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