InterviewKorean banks brace for delicate balancing act in H2

Rena Kwok, a senior credit analyst at Bloomberg Intelligence, speaks to The Korea Times at the newspaper's headquarters in Seoul, Monday. Korea Times photo by Choi Won-suk

The second half of the year will be a delicate balancing act for Korean banks.

The new government's emphasis on financial inclusion and accountability is expected to force lenders to carefully navigate the line between public responsibilities and private profitability. Pressure on earnings and asset quality will mount amid a challenging macroeconomic environment marked by lower interest rates, weak domestic growth and rising tariff risks.

Some market observers warn that the second half of the year could mark the beginning of a downturn, following record-breaking performance levels since 2023.

Financial data provider FnGuide estimates that the combined net profit of Korea's four major financial groups — KB, Hana, Woori and Shinhan — will reach 9.89 trillion won ($7.2 billion) in the first half of 2025. That’s up 5.75 percent from a year earlier, setting a new first-half record.

"While overall credit resilience for the major banks could still hold up, Korea's big-four banks may see moderate pressure on profitability and asset quality in the second half," said Rena Kwok, a senior credit analyst at Bloomberg Intelligence, in a recent interview with The Korea Times.

Domestically, the Lee Jae Myung administration is expected to increase social and political pressure on the financial sector, doubling down on the trajectory set by former President Yoon Suk Yeol. The Yoon administration had urged banks to contribute to social causes, arguing that they earn easy profits through interest margins. Banks have contributed approximately 2 trillion won in donations for "co-prosperity."

"Those that proactively engage in the new social finance agenda may benefit from goodwill and policy support. But banks must prepare for tighter regulation and possibly slower returns," Kwok noted. "The net effect: a more socially aligned banking sector, but one that will have to navigate tougher rules and justify its profitability in social terms."

ATMs of Korea's top four banks are installed at a building in Seoul, April 27. Yonhap

Macroeconomic headwinds remain a major concern. With domestic demand stagnating since Yoon's short-lived martial law declaration last December, delinquency rates on household and self-employed loans have climbed to their highest levels in a decade. The onset of a lower interest rate cycle also poses a threat to profitability.

"To offset this, banks can boost fee-based businesses such as wealth management, insurance brokerage and corporate advisory, while expanding digital banking to lower costs," Kwok said. "International diversification will also be key in the medium term. As domestic loan growth slows, further expansion in fast-growing Southeast Asian markets could provide new growth engines."

At the same time, banks need to keep their promise to maintain their Common Equity Tier 1 (CET1) ratios — a key measure of core capital — in line with broader efforts to enhance corporate value. CET1 gauges a financial institution’s ability to weather losses and reward shareholders.

Kwok noted that this pressure could lead banks to tighten their lending standards, which may inadvertently reduce funding to productive yet riskier sectors such as startups and innovative small- and medium-sized enterprises. Hana Bank, with its broad retail franchise, could feel the impact sooner.

"The challenge lies in ensuring that shareholder return initiatives do not compromise the banks' ability to support the real economy," said Kwok.

Still, the arrival of the new administration has helped ease political tensions, a development Kwok views positively. It could help restore global investor confidence and encourage capital inflows.

"With political uncertainties easing, the focus returns to the Corporate Value-up Program. The sell-side brokerages have begun issuing buy calls," she said. "Korea's credit market as a whole has remained one of the more active in terms of issuance. There is investor interest in better-rated, investment-grade bonds and more liquid instruments. Offshore investors are increasingly looking to park cash in this environment."