Lee Hyo-jin covers the Bank of Korea, the banking industry and broader financial news. Her previous beats include foreign affairs, North Korea and general reporting on Korean society.
INTERVIEW Fitch analyst warns SME borrower risks biggest threat to Korean banks
Matt Choi, analyst at Fitch Ratings / Courtesy of Fitch Ratings
By Lee Hyo-jin
Gov't-led inclusive finance policies unlikely to impair overall banking soundness: analyst
Small- and medium-sized enterprises (SMEs) and self-employed borrowers, whose repayment capacity may weaken under prolonged economic pressure stemming from the Iran war, remain the biggest weak spot for Korean banks, according to Fitch Ratings analyst Matt Choi.
In an interview with The Korea Times in Seoul, Thursday, Choi said Korean banks are expected to maintain relatively stable earnings this year, but warned that risks tied to vulnerable borrowers should be closely monitored.
"We expect Fitch-rated banks, particularly the large commercial banks, to maintain resilient credit profiles and deliver broadly stable near-term performance, given their ability supported by steady net interest margin and also the moderate loan growth for the sector overall," Choi said, adding that he expects Korea's policy rate to remain broadly stable, helping banks preserve interest margins.
Choi is a director of financial institutions at Fitch Ratings. Based in Hong Kong, he covers bank credit ratings in Korea and Hong Kong.
In a recent report, Fitch maintained an A+ operating environment score for Korea's banking sector, one of the highest among major Asian economies.
Still, Choi warned that financial stress among SMEs and self-employed borrowers has persisted longer than previously expected, particularly in sectors tied to domestic real estate and project financing exposures.
"For the asset quality side, we expect the pressure on vulnerable sectors to be sustained, especially for SMEs and self-employed individuals, and we are looking at the monthly loan area ratio, and we are seeing a continued increase of the ratios for those segments," he said.
"We previously expected that to be stabilized, but it appears that the pressure appears to be continued, especially on some of the real estate related exposures," he said.
Automated teller machines belonging to major commerical banks are installed at a building in Seoul, April 12. Newsis
Choi said the Korean government's push for "inclusive finance," including expanded lending support for low-income borrowers and small businesses, could complicate banks' capital management, but is unlikely to weaken the sector's overall soundness.
His comments come as major financial groups have recently flagged such policies as a potential long-term burden on profitability in annual filings submitted to U.S. regulators.
"We generally believe banks would try to meet up those policy initiatives, as long as they can maintain sound intrinsic credit profile. But in terms of strategy planning and capital management, those policies could provide more complexity for the banks," Choi said.
"But the burden itself should not be significant enough to impair the overall soundness of the individual banks," he added.
The analyst also addressed ongoing discussions among financial authorities about revising credit assessment systems to improve loan access for low- and middle-credit borrowers.
Although concrete measures have yet to be announced, alternative credit-scoring models using nonfinancial data are increasingly being viewed as a possible way to better assess borrowers who fall outside conventional credit evaluation systems.
The analyst said the use of alternative data sources could ultimately strengthen banks' underwriting capabilities rather than undermine them, noting that internet-only lenders have already begun adopting such models.
"The alternative models should contribute to enhance the quality of the data banks obtain from external sources, not only the loan area or the delinquency that they can easily obtain," Choi said. "It would make the overall understand underwriting standards more sophisticated."