S&P Expects Domestic Commercial Banks to Focus More on Risk Management Than Growth

"Aligned with the regulatory authorities' strengthened stance on household loan management"

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi] S&P Global Ratings forecasted that domestic banks will maintain a moderate loan growth rate starting this year, following the increase seen last year, while focusing on risk management.

On the 9th (local time), S&P evaluated that the four major banks?Kookmin Bank (A+/Stable/A-1), Shinhan Bank (A+/Stable/A-1), Hana Bank (A+/Stable/A-1), and Woori Bank (A/Positive/A-1)?possess adequate capital adequacy and solid asset soundness despite the impact of COVID-19.

S&P stated, "The 2020 annual results announced last week generally aligned with S&P’s forecasts," adding, "This year, banks are expected to maintain sound asset quality amid the domestic and global economic recovery trend." It further explained, "The principal and interest repayment deferrals related to COVID-19 financial support policies mainly consist of principal repayment maturity extensions for small and medium-sized enterprises, and the related exposure accounted for about 5% of total bank loans as of the end of 2020, which is not a high level. Additionally, over the past few years, major commercial banks have strengthened loan screening standards and reduced exposure to vulnerable sectors such as shipbuilding, shipping, construction, and real estate project financing."

Banking Sector Profitability Expected to Improve Slightly This Year

S&P projected a slight improvement in the profitability of major domestic commercial banks this year. Although net interest margin pressure due to the low-interest-rate environment will continue, the impact of reduced credit costs is expected to be greater. The credit cost ratio, calculated as the ratio of loan loss provisions to total loans, is estimated to be higher than the pre-COVID-19 level of 10bps in 2019 but lower than the 20bps recorded in 2020.

S&P expects major commercial banks to maintain adequate capital adequacy as they return to a moderate loan growth rate of about 5% starting this year. Last year, banks recorded an unusually high loan growth rate of about 10%, which S&P attributes to increased loan demand driven by government payment guarantee support for small and medium-sized enterprises struggling due to COVID-19. It added, "Major commercial banks are expected to maintain a moderate loan growth rate starting this year while focusing on risk management, following the increase seen last year. This aligns with the regulatory authorities’ strengthened stance on household loan management."

Meanwhile, regarding Woori Bank, which has a credit rating one notch lower, S&P noted, "This reflects Woori Bank’s somewhat insufficient credit risk management track record in the past. However, Woori Bank has demonstrated significantly improved risk management capabilities in recent years. If Woori Bank maintains improved risk management capabilities comparable to other major banks over the next 1-2 years while sustaining adequate capital capacity during the group’s non-bank business expansion, its credit rating could be upgraded."

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