South Korean banks' profits in jeopardy with interest rates still low

The Bank of Korea is expected to continue its low interest rate policy well beyond 2021.

South Korean banks’ main source of profit will remain constrained amidst a prolonged period of low interest rates.

The Bank of Korea (BoK) is expected to continue its accommodative monetary policy to sustain economic recovery, Moody’s Investor Service analyst Sean Roh noted in a report. This raises the pressure on banks’ net interest margins and profitability.

The regulator had gradually lowered its policy rate to 0.5% this year in response to the coronavirus pandemic. Given an expected slow economic recovery and weak inflationary pressure, Moody’s expects interest rates in Korea to remain low well beyond 2021.

Prospects for loan growth are also limited whilst the risk of asset quality deterioration remains high amidst a subdued economic environment—both factors further constraining banks' profitability.

"Against this backdrop, we expect banks will accelerate their digital  transformation and overseas expansion to pursue new growth opportunities,"  Roh added.

Banks in recent months have closed or repurposed branch networks in favour of online platforms, Moody’s noted. This improved efficiency but is also raising cybersecurity and privacy concerns.

Furthermore, although expansion overseas could improve profitability, it could lead to higher asset and operational risks in banks, Moody’s warned.

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