Korean banks face irreversible headwinds as disruptions persist

Four regional banks are particularly at risk of asset-quality deterioration.

Disruptions caused by the coronavirus linger on Korean banks as feeble sentiment and external demand may lead to a sharp contraction that may be irreversible until end-2020, according to a Moody’s report.

Four regional banks, namely Busan Bank, Daegu Bank, Jeju Bank, and Kyongnam Bank, are particularly in danger of asset-quality decay due to exposure to coronavirus-hit sectors and regions.

Heightened asset pressure is also possible for the whole banking system but will be cushioned by fiscal and monetary policy measures aimed at easing borrowers’ repayment pressure.

However, whilst the sector is well-capitalised, there is a risk of potential channel for contagion through finance holding companies which own almost all lenders except for certain policy banks.

“Korean banks are therefore exposed to the potential deterioration in solvency and liquidity of their sister companies in the non-banking sector, along with the buildup of unsustainable leverage in their parent holding companies,” analysts Sophia Lee, Tae Jong Ok, Se Hoon Sean Roh, and Minyan Liu said.

There will be a rise in unemployment and longer economic contraction should the pandemic persist for a year or longer, analysts said, which is a credit negative for Korean banks beyond regional ones as commercial lenders have higher exposures to large companies. Capital and loan performance metrics may crumble if large company loans become underwhelming, they concluded.

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