ContributionKorean bank buffers ready to absorb macro, policy shifts in 2nd half

Dealers work at Hana Bank in Seoul, June 20. Korea Times photo by Shim Hyun-chul

Rena Kwok, senior credit analyst at Bloomberg Intelligence

Korea's four largest banks — KB, Shinhan, Hana and Woori — will remain resilient through the second half of 2026, navigating economic shifts and a regulatory and policy agenda. Strong risk controls and government support will prevent severe stress. Although the government's "productive-finance" push and a weak won erode capital buffers modestly, eased regulations and steady earnings will preserve sound capital.

Good underwriting mitigates severe stress

The asset quality of the four banks will be resilient through the second half of 2026 despite moderate deterioration. Risks stem from domestic and global uncertainties, government-led inclusive-finance initiatives and a "productive-finance" policy which leads to riskier corporate lending despite rising loan delinquencies.

Financial stress persists for small businesses and the self-employed amid rising rates, particularly in sectors related to local real estate. Backed by active nonperforming loan (NPL) management and government support for weaker borrowers, 2026 gross NPL ratios should be broadly comparable with 2025, averaging about 0.38-0.42 percent. Preemptive provisions made in 2025 will keep 2026 credit costs steady; solid underwriting and risk controls should limit any rise in credit risk due to high private-sector leverage.

Capital still sound despite productive-finance push

The big four banks should maintain sound capital bases into the second half of 2026, though buffers might dip modestly as the productive-finance initiative tilts growth toward riskier corporate lending. This is partly offset by eased capital regulations, including refined operational-risk rules and expanded structural foreign exchange approvals, keeping consumption of risk-weighted assets (RWA) moderate.

Over the next five years, each bank aims to allocate more than 80 trillion won ($52 billion) to productive finance; they're likely to stagger loan expansion via disciplined RWA management. This will protect capital buffers and support higher shareholder returns despite the impact of won weakness on RWA. Steady earnings should support capital building. The banks' common equity tier 1 (CET1) ratios averaged over 15 percent in the first half of 2026, well above the 9-11.5 percent regulatory minimum.

Sound capital bases can absorb won shock

Although the Korean won had weakened against the dollar by 5 percent year-to-date as of June 10 toward March 2009 lows, the big four banks face only modest capital risk. A weaker won raises RWA for dollar-denominated loans, hurting capital if it's not matched by higher capital.

Contained foreign-currency asset exposure and tight foreign exchange management can keep RWA consumption moderate, offsetting a push into riskier corporate lending aligned with government policy.

Eased capital regulations further cushion the hit. Our sensitivity analysis suggests each 10 won depreciation against the dollar reduces a bank's CET1 ratio by 2-3 basis points.

Bank of Korea headquarters in Seoul / Korea Times file

Recovering interest margins; fee income healthy

The big four banks' net interest margins are set for marginal expansion in the second half, driven by a hawkish Bank of Korea policy shift despite a slight uptick in funding costs.

Loan growth will be modest with market rates rising, as loans to corporations and high-quality small and medium-sized enterprises centered on productive finance offset tepid retail demand driven by tight regulatory curbs on household debt.

Non-interest revenue should be anchored by strong fee income from buoyant capital markets and wealth management activity, cushioning modest bond valuation losses driven by rising market rates.

Credit costs should remain relatively steady, as earlier preemptive provisions buffer moderate risks.

Business dominance underpins stable funding

Korea's big four banks can sustain adequate liquidity through the second half, anchored by large customer deposits that cover more than 80 percent of total funding, and backed by solid domestic franchises and retail networks.

Funding costs might see a slight uptick in coming quarters as banks lift deposit rates to defend against rising benchmark yields, competition from brokerage investment-management accounts and capital outflows into a buoyant stock market.

Foreign exchange funding and liquidity risks remain contained despite the won's 5 percent depreciation this year through June 10, given lower short-term external debt, supervisory oversight and regular stress tests. Tighter deposit-protection rules bolster funding stability. The banks' local- and foreign-currency liquidity-coverage ratios and net stable funding ratios exceeded regulatory minimums.

Rena Kwok is a senior credit analyst at Bloomberg Intelligence. Her area of expertise is in banks and nonbank financial companies in Asia. She is a CFA charterholder and has obtained certification in ESG investing from the CFA Institute.