US tariffs to hurt Korean banks’ profitability

Jonathan Cornish, managing director and head of Asia-Pacific Bank Ratings at Fitch Ratings (Fitch Ratings)

A surge in US tariffs would pummel South Korean banks as the slowdown of Asia’s fourth-largest economy will take a toll on their profitability and asset quality, according to an executive at a global credit rating agency.

“Overall, we would expect to see some negative consequences for profitability,” said Jonathan Cornish, managing director and head of Asia-Pacific Bank Ratings at Fitch Ratings, during an interview with The Korea Herald held at its Seoul office on Wednesday.

Banks do not pay tariffs, nor are they directly involved in international trade.

But when the economy slows, companies become less inclined to expand their businesses and consequently are less likely to borrow from banks.

Also, during an economic recession, the level of non-performing loans could rise, creating uncertainty around lenders’ asset quality.

Among the APAC region, Australia, Singapore, India and the Philippines would be some of the more resilient economies against higher tariffs, while the greater China — China, Hong Kong, Taiwan — and South Korea would be more affected, according to Cornish.

“Korea is one of the more exposed. It is a big exporting country and there are key sectors that are vulnerable to these tariffs — electronics, autos, for example, for which Korea has a strong position in,” he said.

“We have a ‘neutral’ sector outlook on the Korean banking system at the moment, but the potential for that to change to ‘deteriorating’ has increased,” he said.

Though Fitch Ratings expects the US Federal Reserve’s monetary easing to be constrained by inflation outlook, it projects the Bank of Korea would have to accelerate its rate cut cycle to boost the ailing economy.

“Suppose policymakers were to respond to a slower economy by potentially cutting interest rates to support borrowers — which is not uncommon — that is likely to affect the net interest margins of the banking system,” he said.

Earlier this month, Fitch Ratings forecast Korea’s policy interest rate would drop to 1.75 percent by the end of this year, expecting a deeper cut from its previous forecast of 2.25 percent made in March. Currently, the country’s key rate stands at 2.75 percent.

“Right now, the Korean banking system has just come off its cyclical peak in terms of profitability,” Cornish said, referring to how the policy rate had peaked at 3.5 percent from January 2023 to October 2024.

“We expect the banking system and credit growth to be softer this year relative to recent years, in any case, but (the scenario) potentially has downside risks,” he said.

While Fitch Ratings projected that the implications of the tariff policy would impact banks more strongly in the second half of this year and into next year, Cornish said it may not necessarily lead to any ratings action for now.

The country’s top four lenders — KEB Hana Bank, Kookmin Bank, Shinhan Bank and Woori Bank — have maintained an “A” on their long-term issuer default rating by Fitch Ratings.

“Even if the banks were to face negative rating actions on their stand-alone credit profiles, major banks are essentially backstopped by government support,” he said.

Cornish further underlined that it is premature to discuss the outcomes of tariffs as Korea and the US are in negotiations. With top policymakers holding bilateral talks in the US, the two countries agreed to work toward a comprehensive package deal on tariffs before July 8.

“It comes down to what kind of response the governments and the central bank have to whatever tariff outcomes there are. If the policymakers are effective in mitigating the impact of tariff increases, then the ultimate impact on the banks should be less significant as a result,” he said.

silverstar@heraldcorp.com