Sound underwriting shields South Korean banks’ from housing market downturn: Fitch

Unsecured personal loans and small business loans are bigger risks.

South Korean banks’ sound underwriting will provide much needed buffers as the local housing market’s downturn is likely to sustain over the next several years, reports Fitch Ratings.

The rapid monetary tightening has weighed heavily on the local housing market, the ratings agency said.

“Fitch expects the current downturn to last until housing affordability is improved materially by a combination of lower prices, cheaper credit access, and a significant rise in income—a confluence of factors we believe is unlikely over the near term,” Fitch Ratings wrote in a report, “Korean Banks to Weather Housing Market Downturn.”

“We believe that banks’ sound underwriting provides asset-quality buffers to withstand a moderate house-price correction,” it added.

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Prudential measures that are still tight—such as the broadened application of a 40% cap on the debt-service-ratio and persistent lending restrictions on multiple property owners—should support banks in maintaining a sound risk profile.

“We see greater risks on unsecured personal loans that led the overall household loan growth in 2017-2020, and small business loans,” Fitch said.

In comparison, the volume of household loans delinquent by over a month remains low, at only 0.21% of the banking system in August 2022.

The degree of increase in delinquent loans is expected to be moderate, due to the slowing economy, rising interest rates, and housing market downturn in the absence of a severe economic shock.