"Bank-Led COVID-19 Recovery Measures Negatively Impact Credit Ratings"

Image source = Yonhap News

[Asia Economy Reporter Kim Hyo-jin] Concerns are growing that bank-led measures to overcome the novel coronavirus infection (COVID-19) are increasing the credit burden on banks.

According to the financial and investment sectors on the 3rd, the international credit rating agency Fitch recently stated, "The impact of the COVID-19 outbreak on the economy will put significant pressure on banks' credit ratings over the next two years," and downgraded the long-term issuer default rating (IDR) outlooks of KB Kookmin Bank and Shinhan Bank from 'stable' to 'negative.'

Fitch pointed out that KB Kookmin Bank has a higher proportion of loans to households and self-employed individuals compared to other domestic banks, and that Shinhan Bank has higher exposure to service industries requiring personal contact, such as retail, lodging, and food service, than the average commercial bank.

Seo Young-soo, Chief Research Fellow at Kiwoom Securities, cited as one of the key implications of Fitch's assessment that "crisis recovery measures led by policy banks and private banks are having a negative impact on banks' credit ratings."

Seo also mentioned that ▲ (in Q1 this year) the better-than-expected performance was not considered a variable for rating changes ▲ the Q1 results did not reflect the impact of the COVID-19 situation ▲ and unlike the improved performance, most common equity tier 1 capital ratios declined.

Fitch expects the non-performing loan ratio of banks to worsen over the next two years due to the COVID-19 crisis and pointed out that loan principal and interest repayment deferrals, additional loans to small business owners, and contributions to the bond market stabilization fund amid the COVID-19 impact are variables affecting rating adjustments.

Seo forecasted that the delay in restructuring, which had already increased the number of marginal companies before the COVID-19 crisis, combined with the deferral of not only principal but also interest repayments, has made credit management difficult for banks and will be a considerable burden on banks' soundness management going forward.

He also said, "From this perspective, improving the BIS ratio through the early adoption of Basel III and increasing banks' lending capacity is unlikely to significantly help banks' credibility."

However, Seo analyzed that Fitch's downgrade of the IDR outlook is unlikely to be an immediate decisive factor changing foreign investors' attitudes.

This is because the economic shock from COVID-19 in South Korea is relatively smaller compared to other advanced countries, and potential instability has been somewhat alleviated through measures such as the currency swap agreement with the United States.

Seo predicted, "However, if the deterioration of banks' fundamentals accelerates after the COVID-19 crisis and credit ratings are downgraded, it will have a considerable impact on foreign investors."

Moody's recently downgraded the credit rating outlook for the Korean banking industry from 'stable' to 'negative.'

Moody's stated, "Korean banks will face a difficult environment due to the COVID-19 crisis, including the international oil price collapse and liquidity tightening issues," and forecasted, "The risk of loan defaults will increase in sectors such as restaurants, hospitality, transportation, and manufacturing."

This content was produced with the assistance of AI translation services.