Moody's sees limited impact on banks from Korea's 'inclusive finance' push

Arlene Sohn, assistant vice president and analyst at Moody’s Ratings, speaks during a media briefing in Seoul, Tuesday. Korea Times photo by Lee Hyo-jin

The government's push to expand lending to small businesses and vulnerable borrowers is unlikely to have a significant impact on banks' profitability and capital adequacy, a Moody's analyst said Tuesday, as the agency maintained a stable outlook on Korea's banking sector.

"Considering banks' responses and the current operating environment, the overall impact of the inclusive finance policy agenda does not appear to be as meaningful as we initially expected," Arlene Sohn, assistant vice president and analyst at Moody's Ratings, said during a media briefing in Seoul.

Sohn said Moody's had initially expected the government's inclusive finance and productive finance initiatives to put downward pressure on banks' capital positions by increasing exposure to higher-risk corporate loans and lower-credit borrowers.

"As banks move away from mortgage-focused business models toward corporate lending, particularly to small businesses and lower-credit borrowers, we expected average risk weights to rise and create downward pressure on capital," Sohn said. "We also expected profitability to weaken as lenders compete more aggressively in corporate lending while expanding loans to small and medium-sized enterprises under the government’s policy direction."

However, Sohn said, the impact on asset quality is partially mitigated because a substantial portion of policy lending to small buisnesses and vulnerable borrowers is expected to be backed by guarantees.

She added that major banks are also actively managing the growth of risk-weighted assets to maintain capital ratios, limiting the deterioration in overall capital adequacy.

Her remarks came after Korea's major financial groups said in annual reports filed with the U.S. Securities and Exchange Commission that government-led lending initiatives could hurt profitability and asset quality.

The Lee Jae Myung administration has been pressing financial institutions to expand support for low-income and vulnerable borrowers while increasing funding for strategic industries and small businesses as part of its broader economic policy agenda.

Meanwhile, Moody's maintained a stable outlook on Korea's banking sector for the next 12 to 18 months after revising its view from "negative" to "stable" in February.

"Despite various pressure factors, we expect asset quality to remain broadly in line with last year as economic growth recovers," Sohn said.

Moody's expects Korea's real gross domestic product growth to rebound to 2.5 percent in 2026 from 1 percent in 2025, the analyst added, driven by stronger semiconductor exports tied to rising global demand for artificial intelligence.

She cautioned, however, that exchange rate volatility, uncertainty surrounding U.S. tariff policies and polarization in the real estate market remain key risks to the banking sector's operating environment.