Banking Sector Outlook Remains Bright Despite Decline in Household Lending Next Year

Household Lending to Contract in 2026
Corporate Loans to Drive Loan Growth
Major Banks Expected to See 4?5% Loan Expansion

As the trend of strengthening household debt management is expected to continue into next year, analysts predict that banks' profit-generating capacity will remain robust even in 2026. This outlook is based on expectations that corporate lending will expand, driven by policies to promote 'productive finance.' As a result, there are also projections that shareholder returns will be further strengthened. However, issues such as various fines and the need for enhanced risk management due to increased corporate lending are expected to act as burdens.

According to the financial sector on November 18, the growth rate of Korean won-denominated loans at major commercial banks is expected to reach between 4% and 5% in 2026. While household loans, which are a core profit source for banks, are expected to remain sluggish, corporate loans centered on productive finance are projected to expand.

Kyobo Securities forecasts that nine financial holding companies and banks will post growth in won-denominated loans of around 4.3% to 5% next year. Kim Jiyeong, a researcher at Kyobo Securities, stated, "Due to three rounds of real estate measures and the implementation of a stricter debt service ratio (DSR) under the current administration, growth in household mortgage loans is expected to slow next year, and the overall increase in household credit loans will also be limited. As a result, the growth of the bank loan market faces challenges, but the government’s drive to expand corporate lending in productive sectors through the supply of venture capital is expected to lead to an increase in related loans."

Hanwha Investment & Securities also projects credit growth in the 4% range next year. Kim Doha, a researcher at Hanwha Investment & Securities, analyzed, "Although household loans will continue to be sluggish, credit growth will reach the 4% range as corporate loans increase, centered on productive finance."

The decline in net interest margin (NIM), which is directly linked to bank profits, is also expected to narrow. This is due to rising expectations of a freeze in the base interest rate and the continued high bargaining power of banks in setting interest rates, given the low incentive to extend loans, which is raising hopes for an improvement in margins.

With stronger profit-generating capacity, shareholder returns are also expected to gain momentum. Bank stocks have underperformed the KOSPI index over the past year. The KRX Bank Industry Index rose 43.1% compared to the beginning of the year, but this was 16 percentage points lower than the KOSPI return. Over the past three months, the bank index rose only 7.9%, which is 19 percentage points lower than the KOSPI. Kim Jiyeong of Kyobo Securities analyzed, "In the second half of the year, the strong performance of large-cap stocks, especially in semiconductors, and concerns about margin declines if the base rate is cut have weakened investor sentiment for bank stocks."

However, next year, expectations for shareholder returns in financial stocks are expected to grow, with the shareholder return ratio projected to rise to around 50%. Kim Doha of Hanwha Investment & Securities stated, "Major bank holding companies are expected to achieve their previously announced 2027 shareholder return targets ahead of schedule next year," adding, "The ideal shareholder return ratio that can simultaneously enhance return on equity (ROE) and defend the common equity tier 1 (CET1) ratio is estimated to be in the range of 56% to 63%."

Various legislative initiatives being promoted by the government and the ruling party to expand shareholder returns and revitalize the stock market are also increasing expectations that bank stocks will benefit from this momentum. Key examples include: ▲ Adjusting the criteria for major shareholder capital gains tax ▲ Mandating the cancellation of treasury shares and ensuring fairness in their disposal ▲ Separate taxation of dividend income ▲ Introduction of interim dividends.

However, some are voicing concerns that banks will face increasing downward pressure on profitability. Kim Youngdo, Senior Fellow at the Korea Institute of Finance, diagnosed, "Fines related to collusion on loan-to-value (LTV) ratios, fines for the misselling of Hong Kong H-Index equity-linked securities (ELS), an increase in education tax, and the financial burden of establishing the 'New Leap Fund' will all act as downward pressures on bank profits."

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