Why analysts have high expectations for Korea's policy financial institutions

Will capital be provided?

Fitch Ratings says Korea's policy financial institutions (FIs) are likely to play an increasingly important role in the economy, given the government's initiatives to support SMEs and low- to mid-income households, as well as meeting the rising debt restructuring demands from some of the country's troubled corporates.

The increased focus on policy roles means that the privatisations of certain policy banks are likely to not proceed, while Korea Development Bank is likely to be remerged with Korea Finance Corporation.

Here's more from Fitch Ratings:

Korea stands out among developed markets in terms of policy banks and non-policy FIs playing such significant roles within the financial system.

Their support for companies in weak sectors, such as shipbuilding, shipping and construction, is expected to result in asset quality deterioration among the policy FIs, to the point that their capital may come under pressure.

However, Fitch expects the government to provide any capital, if needed, in a timely manner. Meanwhile, support for the broader economy, including employment growth, is expected to indirectly benefit the country's commercial banks.