Banks on edge as president warns against 'easy profits' from mortgages

President Lee Jae Myung presides over a meeting of senior presidential secretaries at the presidential office in Seoul, Thursday. Joint Press Corps

By Jun Ji-hye

• Published Jul 27, 2025 2:56 PM KST

Lenders call for lower risk weights on corporate loans to reform business model

Banks are on high alert following President Lee Jae Myung's warning against relying on "easy profits" from mortgages, referring to their interest margin-driven business models, industry officials said Sunday.

The timing of the president's call for a shift toward more productive financing adds to the pressure, as the four major financial groups — KB, Shinhan, Hana and Woori — posted a record-breaking combined net profit of over 10 trillion won ($7.2 billion) for the first half of the year, largely fueled by interest income.

As political criticism grows over the banks' profit structures, calls for reform are intensifying.

However, shifting focus to small and medium-sized enterprises (SMEs) and self-employed loans, as urged by the president, presents a dilemma for banks. Expanding such loans too aggressively could weaken key financial soundness indicators, potentially undermining their shareholder return strategies.

During a meeting with his senior presidential secretaries last Thursday, Lee sharply criticized domestic financial institutions for their heavy reliance on interest income without pursuing innovation.

"Banks should move beyond easy profits from mortgages and focus on boosting investment. Such a shift is essential to expanding the national economy and ensuring the financial sector's sustainable growth," Lee said.

The challenge for banks is that shareholder returns remain their top concern at present. Financial holding companies determine the scale of those returns based on their common equity tier 1 (CET1) ratio — a core metric of financial soundness.

For example, KB Financial Group has pledged to return capital exceeding a CET1 ratio of 13.5 percent to shareholders and is taking a conservative stance to protect that threshold.

During an earnings conference call on Thursday, Kookmin Bank CFO Lee Jong-min said, "We will pursue growth centered on high-quality assets in the second half of the year, with a focus on balancing profitability and risk. Corporate lending will remain selective, prioritizing risk management."

Responding to the president's call by ramping up lending to small businesses and the self-employed, however, would raise banks' risk-weighted assets, putting downward pressure on their CET1 ratios. That could, in effect, reduce their ability to deliver shareholder returns.

The sense of urgency is growing, especially with the corporate loan delinquency rate reaching 0.77 percent at the end of May — the highest level in seven years amid a deteriorating economic environment.

Following Lee's warning, financial authorities are set to hold an urgent meeting on Monday with the heads of associations across the banking, insurance, credit card and securities sectors, including the Korea Federation of Banks and the Financial Investment Association.

Vice Chairman Kwon Dae-young of the Financial Services Commission, the country's top financial regulator, will convene discussions to explore strategies for increasing investment and promoting a shift toward productive financing.

Although there is consensus on the need to move toward more productive finance, industry insiders emphasize that relaxing capital regulations is necessary to encourage active investment in corporations and venture businesses.

"Amid efforts to enhance shareholder value, such as expanding quarterly dividends, aggressively increasing loans to high-risk small business owners or SMEs poses a significant burden," an official from a major commercial bank said. "We hope the government considers lowering risk weights at least for loans to manufacturing and other industrial sectors, as well as growth-oriented SMEs."