How will new household loan restrictions affect bank stocks?

A view of apartment complexes in Seoul, Friday / Yonhap

The government's announcement of its strongest-ever measures to tighten regulations on household lending is prompting expectations that the recent rally in bank stocks may lose momentum, according to securities analysts Monday.

The outlook comes as tighter lending rules are likely to weigh down on banks' earnings, given that interest income accounts for a large portion of their profits.

The Financial Services Commission (FSC), the country's top financial regulator, announced plans Friday to cut total household lending across all financial sectors to half of the initially projected amount, starting in July.

The measures set a mortgage loan ceiling of 600 million won ($445,000) for home purchases in the Seoul metropolitan area and designated regulatory zones.

Securities firms expect the latest policy measures to reduce the annual growth rate of household loans in the banking sector from the 4 percent range to the 3 percent range, including government-backed loans.

The FSC also anticipates that the new regulations will help curb loan growth by around 20 trillion won each year.

Nevertheless, analysts say the policy's overall impact on bank stocks will be limited, noting the slowdown in household lending could be largely offset by increased corporate financing.

They added that shareholder-friendly initiatives, such as stock buybacks and higher dividends, will continue to support the sector's investment appeal, maintaining their recommendation to overweight banking stocks.

A loan counter at a bank in Seoul is seen in this undated photo / Newsis

"In the short term, the adverse effects of the household debt measures could be mitigated through expanded corporate financing and enhanced shareholder returns," said Ahn Hyun-bin, an analyst at Korea Investment & Securities. "From a mid- to long-term perspective, these policies are favorable for maintaining asset quality and ensuring sustainable growth."

Ahn emphasized that market attention should now focus more on the upcoming second-quarter earnings report at the end of July and shareholder return strategies for the latter half of the year, rather than on household debt concerns.

Choi Jung-wook, an analyst at Hana Securities, pointed out that although household loan growth slowed due to regulatory measures in 2022 and 2023, banks still recorded total loan growth of approximately 3 to 5 percent, driven by an expansion in corporate lending.

"Since banks are currently focused on managing the increase in risk-weighted assets to improve corporate value, they are not aiming for aggressive growth. As a result, the effects of stricter lending regulations will remain limited," Choi said.

Additionally, Choi anticipated that financial holding companies will post record quarterly net profits in the second quarter, noting that foreign investors' buying momentum in bank stocks is likely to strengthen further around the earnings announcement.