Asset quality of South Korea’s big banks to remain supported as interest rate rise 

But bad loans are expected to rise moderately.

South Korea’s four major banks’ asset qualities and income growth should remain supported in the near term despite rising interest rates and a potential economic downturn, reports Fitch Ratings.

Kookmin Bank, Shinhan Bank, KEB Hana Bank, and Woori Bank are likely to maintain varying degrees of headroom in their implied Viability Ratings (VRs), supported by their dominance in Korea’s banking system and sound risk profiles, Fitch said. 

“Larger net interest income can offset the increase in funding, credit and general and administrative costs in the near term,” the ratings agency noted, adding that solid income growth and sound asset quality will find a foothold in the four banks’ strong domestic banking franchise.

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The Bank of Korea may choose to raise its policy rate further from the 175bp cumulative hike since August 2021. As a result, supply chain disruptions and high commodity prices are imminent for South Korea.

Fitch expects to see a rise in the big four banks’ bad loans.

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“Loan quality deterioration from the slowing economy, rising interest rates and the lapse of Covid-19 support measures is likely to be moderate in light of the banks’ improved underwriting standards and credit risk control,” Fitch said. 

“Their focus on prime-quality borrowers and granular and secured loans has led us to raise the risk profile and asset quality scores over the past several years,” it added.