Employees monitor stock prices and exchange rates at the dealing room of Hana Bank’s headquarters in Seoul on July 28. Yonhap News
Fitch Ratings, the international credit rating agency, assessed that the recent high volatility in Korea’s stock market is unlikely to shake the overall creditworthiness of the financial sector. However, it warned that a prolonged decline in stock prices could transmit shocks to the real economy through the housing market and investment sentiment, rather than consumption. Securities firms were identified as the sector where deteriorating profitability from declining trading volume and margin loans would appear first.
According to the financial investment industry on the 8th, Fitch, in its recent report titled “Korea’s Stock Market Volatility, Limited Impact on Short-Term Credit Risk,” diagnosed that Korea’s solid economic growth trend and financial companies’ soundness management mechanisms could absorb a significant portion of the stock market shock.
In particular, Fitch focused on the link between the stock market and the real estate market. According to an analysis released by the Bank of Korea in May, the proportion of stock capital gains that leads to consumption was only 1.3%. This is lower than the 3-4% in major advanced economies such as the United States and Europe. In contrast, non-homeowner households were estimated to shift about 70% of the capital gains earned from stocks into real estate. This means that the wealth effect of rising stock prices is concentrated on home purchases rather than consumption.
A view of Seoul apartments seen from Seoul Sky at Lotte World Tower in Jamsil, Songpa-gu, Seoul. Not directly related to the article. News1
Accordingly, Fitch’s judgment is that if a stock market slump becomes prolonged, home-buying capacity and real estate investment sentiment are likely to weaken first, rather than consumption suddenly plunging. The Bank of Korea also analyzed that, given the recent increase in leveraged investments such as margin loans, a sharp fall in stock prices could simultaneously increase asset declines and debt burdens, amplifying downward pressure on the economy.
Fitch assessed that the direct shock to the banking and insurance sectors would be limited. The growth rate of household loans in the banking sector remained at 3.8% year-on-year through May this year, and there are no clear signs yet that households have sharply increased borrowing for stock investment. Insurers’ direct stock investment is less than 0.5% of assets under management and about 2.3% of capital, so Fitch diagnosed that the impact of falling stock prices on solvency would also be limited.
In the financial sector, securities firms were expected to be the most directly affected by falling stock prices. If the stock market weakness persists, brokerage commissions could decline due to reduced trading volume, and interest income could also slow due to a decrease in margin loan balances.
However, most major securities firms that disclosed their first-half earnings this year saw net profit roughly double from a year earlier, driven by increased brokerage and margin loan interest income, which was assessed as a buffer capable of withstanding management losses.