Korea’s Woori Bank faces lower profits, rising credit costs in 2024

Capitalisation, funding, and liquidity are expected to remain stable.

South Korea’s slowing real estate sector, narrowing interest margins, and high interest rate will lower Woori Bank’s profitability in 2024 and through 2025, according to Moody’s Investors Service.

Capitalization, funding, and liquidity should remain stable, however, and should be sufficient to fund Woori Bank’s loan growth plans in the coming year.

Woori Bank’s problem loans to gross loans ratio will rise 0.5% to 0.6% in 2024, compared to 0.4% in 30 September 2023. The bank should also brace for rising delinquencies from small and medium-size enterprises (SMEs) and retail loans.

A severe deterioration is not expected given that 80% of SME loans and retail loans are covered by either collaterals or guarantees. 

The bank’s single-digit exposure to highly cyclical corporate sectors such as shipbuilding, shipping, and construction; and its low average loan-to-value ratio of below 50% on its retail mortgage loans will also help keep its problem loan ratio manageable. 

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Woori Bank’s exposure to real estate project financing (PF) is also low, accounting for less than 1% of gross loans and comprising senior tranches.

Increasing credit costs, however, is on the horizon. Net interest margins are expected to fall to 1.6% from the 1.72% reported in the nine months of 2023, stemming from increasing competition for corporate loans.

Should trouble arise, Woori Bank is expected to get a “very high level” of government support given its designation as a domestic systematically important bank in Korea, with an 11.7% market share of the total system assets as of 30 June 2023.

The government also has a track record of bailing out distressed commercial banks.There is the legal framework under Article 38 of the Depositor Protection Act, which states the Korea Deposit Insurance Corporation may provide financial assistance to an insolvent financial company or a financial holding company.

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Furthermore, Article 12 of The Act on Structural Improvement of the Financial Industry, states that the Financial Services Commission may request the government to make investments in insolvent financial institutions.