Gov't support, high vax rates buoy Korean banks’ asset qualities: Fitch

But increased competition in lending may give rise to risks in the long-term.

Government support for small businesses and high vaccination rates should buoy South Korean banks from asset-quality risks stemming from the onslaught of Omicron COVID-19 cases, reports Fitch Ratings.

The country reported over 200,000 new cases on the fifth consecutive day as of 8 March, according to the Korea Disease Control and Prevention Agency. Severe cases also reportedly hit their highest in two months, surging over 1,000.

Amidst this backdrop, the Financial Services Commission (FSC) floated plans to re-extend the window for loan-repayment deferral applications for the fourth time, to September 2022. This reflects, in part, risks to businesses posed by restrictions on social activity, which have been maintained in response to the threat posed by the current wave of Omicron COVID-19 cases, according to Fitch.

FSC also plans to introduce measures to relieve the debt repayment burden of vulnerable borrowers; for example through an option to spread repayment amounts over a period of up to five years.

This government support should ease risks to South Korean banks arising from the COVID situation.

“We expect support to be sustained in the near term, whatever the outcome of the presidential elections on 9 March, as there is cross-party backing for policies to support self-employed individuals,” Fitch Ratings said.

“We believe the various forms of official support reduce the risk that a rise in COVID-19 cases, such as that under the Omicron wave, could result in significant asset-quality deterioration for Korean banks,” the ratings agency added. 

Support for small merchants will also help ease risks from the sector, Fitch said. A supplementary budget passed in February provided $7.9b (KRW9.6t) for small business owners, on top of previous compensation that had been provided to offset the effects of the restrictions on social activity.

The Korean government has also provided guarantees and interest-margin compensation to encourage banks to supply low-cost loans to small merchants hit by the pandemic. 

The high vaccination rate amongst South Korans–which as of press time stood at 86%, according to Fitch– should also help to cushion economic growth against the current and future COVID-19 waves.

Loan impairments
Despite this, expect to see a modest pick-up in loan impairments associated with loans to self-employed individuals and small and medium-sized enterprises (SMEs) affected by the pandemic, warns Fitch.

On the upside, this pick-up will be delayed further by the fourth extension of the deferral window. 

Total relief loans accounted for about 10% of banking system loans to small businesses at the end-2021. 

Loans underpayment holiday, which face higher risk, also accounted for less than 1% of system loans to self-employed individuals and SMEs, Fitch said.

Greater competition is a negative
Despite government support to small businesses being a positive for banks’ asset qualities in the immediate timeline, it might also contribute to longer-term risks, warns Fitch.

Official support for small businesses and a tightening of prudential standards on lending to households have increased competition amongst banks lending to self-employed individuals, according to Fitch. 

“This trend may be further aggravated as internet-focused banks like Toss Bank, KBank and Kakao Bank have either launched products aimed at the self-employed or plan to do so in 2022.” Fitch said. 

“We believe this could pose longer-term risks to banks’ asset quality if it results in a weakening of underwriting standards,” it warned.

Any sharp rise to Korean interest rates could also adversely affect asset quality, as it will impair borrowers’ repayment capacity. 

“The authorities have already begun to raise rates, most recently in January 2022. There is a risk that the pace and scale of tightening could accelerate should the Russia-Ukraine conflict increases inflationary pressure on a sustained basis,” Fitch further warned. 

“Nonetheless, we expect the credit effects of higher rates on asset quality would be offset in part by an accompanying widening in net interest margins,” it concluded.