HONG KONG (S&P Global Ratings) Feb. 5, 2020--An economic downturn stemming from the coronavirus outbreak will likely weigh on Korean banks' asset quality and profitability in the coming few quarters. Nevertheless, S&P Global Ratings believes the Korean banks have adequate capital buffers and prudent risk management to weather the outbreak without any downgrades.
The economic slowdown in China, the center of the coronavirus outbreak, will drag on export-oriented Korean firms. China is Korea's largest trading partner, accounting for about one quarter of the country's exports. A decline in public activity and a drop in the number of inbound visitors may dampen domestic consumption. These dynamics may also erode household income, straining the loan quality of highly indebted Korean households.
We expect that the peak impact of the virus on economic activity across Asia-Pacific will be in the first and second quarters. Growth in the region should stabilize later in 2020 and recover through early 2021.
We anticipate events will likely translate into a modest rise in credit costs for Korean banks. We expect industries such as shipbuilding, shipping, and steel could be particularly pressured, as the sectors continue to face stiff competition amid global overcapacity. There may be also some challenges to the manufacturing sectors, including carmakers, which has seen temporary production halts following supply disruptions from certain component makers in China.
The coronavirus will also exert headwinds on the wholesale, retail, accommodation, and food service industries. Korean banks' exposures to these segments are moderate, collectively accounting for about 10% of total loans as of September 2019.
Korean banks have adequate capital buffer to navigate the headwinds, supported by a strengthening of risk management, in our view.
Over the past several years, Korean banks have tightened underwriting standards, increased provisioning, and reduced exposure to risky sectors such as shipbuilding, shipping and real estate project finance loans.
Korean banks' nonperforming loan ratios and credit costs have steadily improved, with the metrics at historically low levels in recent years. We estimate the banks' average credit costs--as measured by provisioning to total loans—to come in at about 30 basis points in 2019, compared with about 60bps, on average, in 2015-2017. The banks' average nonperforming loan ratio fell to about 0.85% in September 2019, from about 1.80% at the end of 2015.
We also think the Korean government and the central bank may pursue expansionary fiscal and monetary policies to limit any severe economic fallout. Indicatively, the government provided funding and liquidity support to some small to midsize enterprises through policy banks or government guarantee funds during the outbreak of Middle East respiratory syndrome (MERS) in Korea in 2015.
Faced with a MERS-induced economic slowdown, the Bank of Korea cut the policy rate in June 2015. The MERS outbreak lasted about seven months in Korea with 186 infections and 38 deaths. The outbreak is estimated to have subtracted about 0.3 percentage points of Korea's GDP growth in 2015, according to a government official.
In Korea, 18 patients are infected with coronavirus with no deaths to date. We expect loan demand may slip in this climate, but this depends on the magnitude of the coronavirus outbreak in Korea. The government's expansionary policy stance may head off any substantial reduction in loan demand, in our view.
Korean banks' continued prioritization of risk management over growth will enable them to maintain adequate capitalization. The banks should maintain their resilience despite profit pressures over the next few years, stemming from higher credit costs and lower net interest margins amid a low interest rate environment. The banks' regulatory common equity Tier 1 and Tier 1 ratios were steady at about 12.8% and 13.4%, respectively, as of September 2019.
In our opinion, Korean banks will likely manage foreign currency funding and liquidity risks despite a potential increase in global financial market volatility. This is largely on the back of improved risk management, seen for example in a lengthening in tenors and the accumulation of highly liquid foreign currency assets. The banks have notably improved on these measures compared with where they were during the 2008 global financial crisis, for example.
That said, if the economic downturn becomes much more severe, leading to a significant reduction in the banks' capitalization or a sharp deterioration in asset quality along with a spike in credit costs, some Korean bank ratings may come under pressure.
This report does not constitute a rating action.
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| Primary Credit Analyst: | Daehyun Kim, CFA, Hong Kong (852) 2533-3508 ; daehyun.kim@spglobal.com |
| Secondary Contacts: | HongTaik Chung, CFA, Hong Kong (852) 2533 3597; hongtaik.chung@spglobal.com |
| Emily Yi, Hong Kong (852) 2532-8091; emily.yi@spglobal.com | |
| Scott Han, CFA, Hong Kong (852) 2532-8022; Scott.Han@spglobal.com | |
| Media Contact: | Ning Ma, Hong Kong (852) 2912-3029; ning.ma@spglobal.com |
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