Major South Korean banks, although highly exposed to the coronavirus-hit services and manufacturing sectors, are likely well positioned to absorb the shock as they have sufficient capital buffer and relatively low levels of bad loans.
The COVID-19 outbreak, which triggered a cut to the benchmark interest rate at an unscheduled monetary policy meeting March 15, is expected to exert pressure on certain industries. Tourism, hospitality, manufacturing and retail are among sectors likely to be most affected by the pandemic. The exposure of South Korea's four biggest banks — KB Kookmin Bank, Shinhan Bank Co. Ltd., KEB Hana Bank and Woori Bank — to these sectors totaled 215 trillion South Korean won as of September 2019, according to Financial Supervisory Service data.
Moody's highlighted the potential impact of reduced tourism from China and local consumption on South Korean businesses in a Feb. 18 report.
Chinese travelers accounted for 35% of total foreign tourists in 2019, according to Korea Tourism Organization. A decline in Chinese visitors would mean difficulties for the South Korean hospitality industry, duty free shops and tour bus companies, the report said. Domestically, Moody's analysts expect the decline in public gatherings and the hesitation to venture out of homes to hamper consumer spending.
"It is highly likely that the service sector's delinquency rate of individual businesses will go up because domestic sales will fall," said Kyung-hwe Koo, an equity analyst at SK Securities.
The manufacturing sector faces both short-term and medium-term risks, said Michael Makdad, an equity analyst at Morningstar, citing supply disruptions and lower demand. According to data from the United Nations Conference on Trade and Development released March 4, South Korea’s machinery and communication equipment sectors may be hurt by China's supply chain disruptions. A 2% reduction of China exports could potentially translate to a US$578 million and US$687 million hit on the two sectors, respectively.
Strong bank capitalization
However, despite the risk posed by the higher possible default rates of these borrowers, analysts are optimistic that the banks' strong Tier 1 capital ratios might act as a buffer in the volatile economic environment.
"The CET1 capital ratios of the three largest [banking] groups are near the average or slightly higher than the average of global banks and asset quality is better than it has ever been in [South] Korea’s recent history," said Makdad. "So they are more capable of withstanding this shock than [South] Korean banks would have been in the past."
That optimism also echoed in Moody's Feb. 18 report, which said South Korean banks' "very strong" capital and benign asset quality "are likely to provide a buffer against the disruption caused by the coronavirus outbreak."
As of end-2019, the four major banks' nonperforming loans ratios sat at around 0.4%, which were at historically low levels, according to a Feb. 13 S&P Global Ratings report. That compares with an average NPL ratio of 0.5% as of end-2018 and 1.2% end-2015.
Bank of Korea acts
In an unscheduled meeting on March 15, the Bank of Korea trimmed its benchmark interest rate by 50 bps to 0.75% just hours after the U.S. Federal Reserve slashed its federal funds rate to almost zero. South Korea's central bank had previously left its benchmark interest rate unchanged during its last meeting on Feb. 27. It also lowered the interest rate on the Bank Intermediated Lending Support Facility to incentivize lending to small and medium-sized enterprises, and said it will broaden the eligible collateral for open market operations to include bank debentures from April 1.
"Considering the high level of uncertainties regarding financial and economic conditions at home and abroad, the board will maintain its accommodative monetary policy stance going forward so as to reduce the downside risks to the real economy and ease volatility in the financial markets," the Bank of Korea said.
Analysts had expected the authorities to announce easing measures to help the economy cope with the uncertain economic conditions caused by the virus outbreak.
"We think the [South] Korean government and the central bank may pursue expansionary fiscal and monetary policies to limit any severe economic fallout," said Daehyun Kim, a credit analyst at S&P Global Ratings, citing similar funding and liquidity supports introduced by the South Korean government during the Middle East respiratory syndrome outbreak in 2015.
The banks' net interest margins would have been expected to stabilize toward mid-2020 after the key rate cuts in July and October 2019 if the outbreak did not occur, Makdad said. "Now, we can expect NIMs to slide all year long," he said in a comment he reconfirmed after the central bank's easing move. The banks' average net interest margin was 1.79% in 2019, according to S&P Global Market Intelligence data.
As of March 16, US$1 was equivalent to 1,227.95 South Korean won.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.