[2026 Economy and Finance Outlook Focus] ②Banks Face Downward Profit Pressure... Fierce Competition for Corporate Loans

Household Debt Volume Control Policies
Overall Growth in Household Loans, Especially Mortgages, Faces a Brake
Base Rate Cut Trend... Net Interest Margin Contraction Unavoidable
Strengthening of Productive Finance Continues
'Coin War' Accelerat

Editor's NoteThe Year of the Red Horse has dawned. This year, the Korean economy is expected to move past last year's ultra-low growth, which followed the aftermath of the 12·3 Martial Law, and embark on a path of genuine growth rate improvement. However, compared to the past, when periods of darkness in growth were followed by brighter recoveries, this rebound is expected to remain modest. There are numerous key variables to monitor, including global supply chain changes due to the spread of protectionism, the continued dominance of artificial intelligence (AI) that is driving Korea's semiconductor export boom, as well as high exchange rates and real estate issues. The banking sector is expected to face a tough year, as policies to curb household lending put downward pressure on profits, while competition for corporate loans intensifies. The insurance sector is also expected to see its profitability and financial soundness threatened by sluggish core business and tighter regulations. In these challenging circumstances, the financial authorities' policy and supervisory priorities are household lending regulation, productive finance, and financial consumer protection. The plan is to maintain the total volume regulation on household loans, while focusing on regulatory easing and incentives for productive finance. Over the course of four articles, we will examine the major challenges that Korea's economy, financial industry, and policy must overcome this year, carrying the spirit of the 'Red Horse.'

Exterior view of the headquarters of KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank. Provided by each company

This year, banks' performance is expected to remain at a similar level to last year. Although household lending restraint policies will continue, the prevailing view is that the decline in banks' net interest margin (NIM) will not be significant. However, various government requests for contributions, fines related to loan-to-value (LTV) ratio collusion, and fines for the misselling of Hong Kong H Index (Hang Seng China Enterprises Index, HSCEI) equity-linked securities (ELS) could exert downward pressure on banks' profits. Competition among banks for corporate loans and the battle for dominance in the stablecoin market are also expected to intensify.

Lee Jaemyung Administration's 'Curbing Housing Prices'... Banks Face a Brake on Household Loan Growth

The Lee Jaemyung administration's policy of curbing housing prices and its emphasis on productive finance will continue this year. Policies to manage the total volume of household debt and restrict loans related to housing in the Seoul metropolitan area will inevitably limit the growth of bank lending. Moreover, if the stock market boom continues to drive a 'money move' toward the capital market, it will be difficult for banks to increase their loan-to-deposit ratio growth. Choi Jungwook, an analyst at Hana Securities, diagnosed, "The likelihood of the total loan growth rate rising significantly above 4~5% is low." A senior executive at a major financial holding company also said, "Considering regulations and the possibility of interest rate cuts, the decline in NIM is seen as a structural trend."

However, the decline in NIM, which is directly linked to bank profits, is expected to remain at a similar level to this year. According to the Financial Supervisory Service, the cumulative net profit of domestic banks for the third quarter of last year was 21.1 trillion won, an increase of 2.3 trillion won compared to the same period the previous year (18.8 trillion won). Although the NIM shrank by 0.07 percentage points due to falling interest rates, the scale of interest-earning assets expanded, and non-interest income also maintained solid results. Lee Yeri, a senior researcher at the Korea Institute of Finance, explained, "While the possibility of a base rate cut could reduce NIM, recently rising market rates and the strengthening of household loan management have led to higher spreads, which support the downside of NIM."

'Productive Finance' in Full Swing... Intensifying Competition for Corporate Loans Among Banks

While household loan growth is slowing, banks are expected to expand credit mainly through corporate loans. However, if banks expand productive finance, which has a strong policy orientation, they will face the challenge of ensuring financial soundness, such as delinquency and capital ratios.

The five major financial holding companies-KB, Shinhan, Woori, Hana, and NH Nonghyup-have declared a major shift toward 'productive finance' and announced plans to inject 508 trillion won into productive and inclusive finance by 2030. As a result, competition among banks for corporate loans is expected to intensify. A senior official in the banking sector said, "Since the second half of last year, competition among banks for corporate loans has intensified, making business more difficult," adding, "This trend is expected to continue this year."

However, as the expansion of corporate loans is strongly policy-driven, the effect on NIM improvement is expected to be limited. Senior researcher Lee explained, "Corporate loans have lower interest rates compared to household loans, so the effect on net interest margin improvement is limited," and added, "Expanding loans to innovative companies involves a burden of credit loss costs."

"Decline in Asset Quality and Loss Absorption Capacity"

Within the financial sector, there is a prevailing view that risk management, including maintaining asset quality and capital adequacy, will become even more important as productive finance expands. Not only is the delinquency rate for small and medium-sized enterprise (SME) loans rising rapidly, but if credit is extended to companies with high risk weights, a decline in capital ratios will be inevitable.

According to the Financial Supervisory Service, the SME delinquency rate has been rising every year, from 0.49% in September 2023 to 0.65% in September 2024, and 0.75% in September last year.

There are also projections that banks' asset quality and loss absorption capacity could deteriorate this year. The KDB Future Strategy Research Institute stated, "Due to the impact of U.S. tariff policies leading to slowing exports and delayed recovery in private consumption, corporate growth and profitability are expected to worsen." The growing proportion of 'vulnerable companies' unable to repay interest through operating activities is also cited as a risk factor. In industries undergoing major restructuring, such as petrochemicals and steel, the risk of corporate insolvency could increase.

However, considering the ratio of substandard and below loans and the loan loss provision coverage ratio in the banking sector, some assessments suggest that the situation is not at a level of serious concern. The ratio of substandard and below loans and the delinquency rate remain below the long-term average (the substandard and below loan ratio and delinquency rate averaged 1.10% and 0.55%, respectively, from the second quarter of 2011 to 2025). According to the Financial Supervisory Service, as of the third quarter of last year, the ratio of non-performing loans (substandard and below) at domestic banks was 0.57%, and the delinquency rate was 0.51%. The loan loss provision coverage ratio stood at 164.8%.

The 'Coin War' for Market Leadership Is Also Expected to Intensify

Alongside competition for corporate loans, the battle for dominance in the Korean won stablecoin market, which is entering its final stages, is expected to heat up further this year. Korean won stablecoins, a form of digital currency, enable real-time remittance, payment, and settlement, making them a focus as next-generation payment infrastructure. Related legislation is also under discussion in the National Assembly.

Banks are also busy preparing behind the scenes to secure an early lead. KB Financial Group has established a dedicated stablecoin division and directly developed relevant infrastructure during the Bank of Korea's central bank digital currency (CBDC) pilot project. Shinhan Financial Group is preparing a pilot project for Korean won stablecoin payments on the food delivery application 'Ttaenggyeoyo.' Hana Financial Group has signed a memorandum of understanding (MOU) with Circle, the issuer of USD Coin (USDC), which holds the second-largest share of the global stablecoin market, while Woori Financial Group is also developing strategies through equity investments in startups such as BDAX.