South Korean banks, already hit by rising credit costs, face more pressure on their margins after the nation's central bank cut its benchmark rate to a record low to support an economy reeling from the coronavirus pandemic.

The Bank of Korea cut its base rate by 25 basis points to 0.50% on May 28, citing slowing domestic economic growth, sluggish consumption and a significant decline in exports. The central bank also left the door open for further easing after its second rate cut of 2020, saying that it would "maintain its accommodative monetary policy stance."

The latest rate cut could put "modest pressure" on South Korean banks' net interest margins, according to Daehyun Kim, a credit analyst at S&P Global Ratings.

Although local banks are still sufficiently capitalized to absorb the virus shock, the rate cut "pushes down NIM for several quarters," said Michael Makdad, a senior equity analyst at Morningstar. He expects NIMs to fall between 12 basis points and 20 basis points in 2020 and by a further 5 basis points in 2021.

"Korean bank NIMs are lower than in the U.S. or most emerging markets but higher than Japan or Europe," Makdad said.

The country's four biggest banks reported lower first-quarter NIMs year over year, and most stepped up provisions for credit losses due to the weaker economic outlook. KB Kookmin Bank's NIM slipped to 1.56% from 1.71% year over year, while KEB Hana Bank's NIM declined to 1.39% from 1.55% over the same period, crimped by prior rate cuts.

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Lowering the benchmark interest rate may ease the credit environment, but credit costs, as measured by provisioning to total loans, may double for South Korean banks from their pre-pandemic levels due to the weaker economic outlook. The local banks' credit costs may rise to about 55 basis points this year, Kim said. That compares with an estimated 30-basis-point rise in 2019, according to a Feb. 5 note by S&P Global Ratings.

The banks' asset quality and credit costs need to be closely monitored amid the novel coronavirus pandemic, Kim said.

"There is a question of how much in credit costs will result from the pandemic, but furthermore I think there is an emerging risk from U.S.-China tensions," Morningstar's Makdad said. "I think the risk of expanded U.S.-China trade war is a risk for Korean banks, as their borrowers' supply chains could be disrupted."

The central bank now expects the nation's GDP to contract 0.2%, compared with its February forecast of a 2.1% growth. It also judges the uncertainties around the future path of GDP growth as "very high" and will "conduct monetary policy in order to support the economy and stabilize consumer price inflation at the target level over a medium-term horizon, while paying attention to financial stability," according to the monetary policy statement.