Office buildings in the financial district of Yeouido, Seoul / gettyimagesbank
Korea has lowered its economic growth forecast for 2025, citing the repercussions of the political situation surrounding impeached President Yoon Suk Yeol and external risks stemming from global trade tensions, including potential tariff measures under incoming U.S. President Donald Trump.
The Ministry of Economy and Finance now sees the economy growing 1.8 percent in 2025 after expanding 2.1 percent last year, it said in a statement on Jan. 2. Those projections are down from July's forecasts of 2.2 percent and 2.6 percent, respectively. The updated outlook reflects slowing private consumption and weakening export momentum, exacerbating the challenges faced by the trade-dependent nation.
Rena Kwok
Global economic uncertainties remain a critical concern, with the ministry highlighting a potential correction in demand for memory chips — a key export for Korea — and intensifying competition among export-driven economies. Additionally, potential capital outflows to the U.S. and the ongoing domestic political instability have further clouded the nation's economic prospects.
The country is still grappling with the fallout from President Yoon Suk Yeol's short-lived imposition of martial law on Dec. 3, a move that led the National Assembly to pass an impeachment motion against him. The controversial decision unsettled financial markets, dampened business confidence and strained Korea's diplomatic efforts.
The Bank of Korea (BOK) is now putting growth support ahead of risks related to elevated household debt. It has delivered 50 basis points of rate cuts since it started an easing cycle in October.
Against this challenging environment, Korea's major banks — KB Kookmin, Shinhan, Hana and Woori — are working to maintain business stability. Their credit profiles can be assessed on several key areas, such as asset quality, capital strength and liquidity management.
Bolstering asset quality
Despite Korea's elevated private-sector debt, the country's four major banks have managed their asset quality through prudent lending practices.
They enforce strict debt-service ratios and maintain low loan-to-value ratios (40 to 50 percent) on mortgage lending and high-quality loan collateral for small business lending. Their exposure to risky real estate projects is limited to below 2 percent of total assets, focusing on high-quality residential developments mainly in the Seoul metropolitan area.
We expect the government's stabilization measures through 2025 and regulatory reforms aiming to support viable projects and boost financial oversight will help to stabilize the property project financing market over the medium term.
These conservative strategies have helped keep nonperforming loans low, with their average substandard or below loans ratio forecast at 0.4 percent in 2025.
Lawmakers vote on a motion to impeach President Yoon Suk Yeol over his short-lived imposition of martial law at the National Assembly in Seoul, Dec. 7. Korea Times photo by Choi Won-suk
Additionally, their loan-loss risk buffer, averaging 205 percent as of the third quarter of 2024, offers a strong buffer against unexpected loan defaults. While loan delinquencies from small business and unsecured retail borrowers remain a risk to watch, gradual interest rate cuts and government support measures could partly ease this pressure by reducing repayment burdens.
The major banks are also expected to maintain robust capital buffers against tighter regulatory requirements. With common equity tier 1 ratios of at least 13 percent as of the third quarter of 2024, well above our stipulated safe threshold of 11.5 percent, they have ample room to absorb potential credit losses.
Although falling interest rates and debt restructuring measures could pressure net interest margins, reduced credit losses may partially help offset some of this impact. Their average return on assets may reach 0.5 to 0.6 percent in 2025.
However, their ability to generate substantial valuation gains from securities holdings could remain limited due to their preference for short-term securities, held mainly for liquidity management purposes.
Strong capital positions will also support dividends for their parent holding firms' potential modest M&A plans for earnings diversification without compromising financial stability.
Liquidity, meanwhile, remains healthy for the major banks. With deposits accounting for at least 80 percent of total funding, they benefit from a stable funding base that insulates them from potential liquidity shocks. Their average loan-to-deposit ratio stood at 97 percent as of the third quarter of 2024, indicating a balanced approach to lending and deposit management. Their market dominance also positions them to attract safe-haven deposits during times of financial stress.
Stability despite volatility
Adequate underwriting and risk controls by the major banks, along with likely gradual interest rate cuts by the BOK in 2025, can bolster resilience in their bonds spreads despite Korea's high private-sector leverage, weaker growth outlook and near-term volatility due to the country's political situation.
Looking ahead, the country's leading financial groups could pursue selective modest M&A deals to diversify revenue streams amid expectations of interest rate cuts by the BOK.
Woori and Hana Financial groups may take a measured approach to expand their relatively smaller nonbanking businesses via M&As to beef up earnings diversification and competitiveness in comparison to major peers.
Woori's planned acquisitions of Tongyang Life and ABL Life, pending regulatory approval, could strengthen its insurance business given the entities' sizable positions but may face near-term challenges due to a former chairman's scandal. If approved, these deals could enhance cross-selling capabilities and help narrow profitability gaps with larger peers over the medium term.
ATMs of major banks are installed in central Seoul, Sunday. Yonhap
The major banks also aim to achieve their medium-term goal of building sustainable banking franchises outside the domestic market, particularly in the fast-growing Southeast Asian market. Currently, overseas assets account for just about 7 percent of their consolidated assets as of the end of 2022, highlighting untapped potential for expansion.
However, global expansion has been challenging. The banks collectively reported a combined net profit of 338 billion won ($230 million) from overseas operations in the first half of 2024, down 38 percent from the previous year.
This underscores the need for a broader business strategy beyond retail banking, focusing on high-growth sectors offering specialized financial products, expanding services like foreign exchange, cash management, consulting and leveraging on cross-selling across their banking and nonbanking business units.
Korea's banking sector stands at a crossroads as it navigates a slowing economy, tighter regulatory demands and the evolving market dynamics and political situation.
Investors need to closely monitor how these financial giants adapt to a shifting macroeconomic environment, balancing domestic and international growth while safeguarding long-term stability. Their ability to manage risks while seizing new opportunities will be crucial in shaping the country's financial sector future.
Rena Kwok is a senior credit analyst at Bloomberg Intelligence. Her area of expertise is in banks and nonbank financial companies in Asia. She is a CFA charterholder and has obtained certification in ESG investing from the CFA Institute.