Moody's, Korea Ratings: "Downward Pressure to Persist for Banks and Non-Bank Financial Institutions"

Moody's and Korea Ratings Announce Joint Webinar on "Building Resilience in a Changing Economic Environment"

Moody's and Korea Ratings have projected that downward pressure will continue on the domestic banking sector as well as non-bank financial institutions such as card companies, insurers, and securities firms next year. With expectations for interest rate cuts weakening, the increasing uncertainty surrounding trade policy and foreign exchange volatility is expected to act as negative factors.

On November 25, Moody's and Korea Ratings held a joint media briefing titled "Korea Credit Outlook 2026 - Building Resilience in a Changing Economic Environment" and shared this outlook.

Moody's maintained a "Negative" outlook for the domestic banking industry next year. The policies of the new administration and the impact of U.S. tariffs have played a role. The inclusive finance stance of the Lee Jaemyung administration is expected to put pressure on banks' asset quality, capital adequacy, and profitability. However, Moody's also noted that, in the long term, these policies are expected to help improve the operating environment and soundness of banks.

Son Jungmin, an analyst at Moody's, stated, "Due to the expansion of corporate loans and low-interest loans, the proportion of relatively low credit-loss and stable mortgage loan portfolios is expected to decrease somewhat. This portfolio shift, driven by an increase in higher risk-weighted corporate loans, will put pressure on capital adequacy, while the expansion of low-interest loans and higher credit loss expenses will also weaken profitability."

He added, "Policies aimed at restricting household debt are expected to reduce asset risk and strengthen buffers against declines in collateral value. However, if the recovery of local real estate markets is delayed due to stricter policies, there is a possibility that the soundness of corporate loans and mortgage loans in related sectors could deteriorate."

The outlook for non-bank financial institutions is also unfavorable. From a macroeconomic perspective, the weakening expectation for interest rate cuts and high household debt are expected to be burdensome. In addition, the government's strengthened management of household debt, as well as enhanced debtor protection and support for rehabilitation, are expected to be negative factors for capital and credit card companies.

For the capital sector, differentiated performance among credit ratings is expected to emerge due to portfolio restructuring. Kim Hyungseok, Head of Korea Ratings, explained, "Since there are concerns that funding rates may rise rather than remain stable, liquidity management will become important. In the medium term, it will be critical to identify new sources of revenue to replace real estate project financing (PF) and to manage risks arising from these changes."

In the card sector, pressure on profitability is increasing due to slowing growth and tighter regulations. He analyzed, "In the short term, card companies need to monitor the recovery of private consumption, changes in the funding environment due to interest rate fluctuations, and how they manage the soundness of loans."

For insurers, growth is expected to continue, particularly in protection-type insurance, but the increase in new contracts is expected to slow somewhat due to intensified sales competition. However, management of the risk-based capital ratio (K-ICS) will remain a challenge. He said, "Financial authorities also plan to introduce regulations on the risk-based capital ratio for basic capital to prevent the qualitative deterioration of basic capital, and it will be important to watch how companies respond."

The securities sector is also expected to maintain its growth momentum. He stated, "Given the policy support to strengthen the deposit base for the securities industry to boost venture capital supply and the increase in trading volume in the second half of the year, robust growth is expected to continue. However, there will be ongoing requirements for capital adequacy management during the expansion of investment banking (IB) operations."

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