S&P "South Korean Banks' Operating Environment to Worsen Further"

[Asia Economy Reporter Hyunseok Yoo] Global credit rating agency Standard & Poor's (S&P) forecasted on the 14th that the operating environment for domestic banks in Korea will become more challenging.

In a report on Korean commercial banks published on the same day, S&P stated, "The global demand contraction could lead to a slowdown in growth for Korea, which has an export-driven economic structure." It added, "The slowdown in the real estate market could also lead to a contraction in domestic demand, which is a factor that increases the burden on banks' asset soundness."

S&P projected that Korea's private sector leverage ratio (debt) relative to nominal Gross Domestic Product (GDP) will remain at a high level of about 210% over the next two years. Kim Daehyun, Director at S&P, explained, "The burden of principal and interest repayments by borrowers due to the steep rise in interest rates will somewhat deteriorate the asset soundness of Korean banks."

However, major domestic commercial banks succeeded in improving overall profitability last year. The loan loss provisions set aside proactively are also expected to help manage financial risks going forward.

According to S&P, the average return on assets (ROA) of KB Kookmin Bank (A+·Stable), Shinhan Bank (A+·Stable), Hana Bank (A+·Stable), and Woori Bank (A+·Stable) rose from about 0.58% in 2021 to approximately 0.65% last year.

Director Kim said, "Major Korean commercial banks have been additionally setting aside loan loss provisions over the past few years," adding, "This could somewhat alleviate the burden of asset soundness deterioration in the future."