US tariffs to hurt Korean banks' profitability: Fitch

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

While Korea and the US agreed to work toward a comprehensive package deal aimed at removing new US tariffs, Jonathan Cornish, managing director and head of Asia-Pacific Bank Ratings at Fitch Ratings, suggested that local lenders could suffer a blow from higher tariffs.

“Overall, we would expect to see some negative consequences for profitability,” Cornish said during an interview with The Korea Herald at his office in Yeouido, western Seoul, 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 business and consequently are less likely to borrow from banks, putting pressure on the lenders' earnings.

Also, during an economic recession the level of nonperforming loans could rise, creating uncertainty around lenders' asset quality.

Among the Asian-Pacific region, Australia, Singapore, India and the Philippines would be some of the more resilient economies against higher tariffs, while China, Hong Kong, Taiwan and 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. "Korea is one of those more vulnerable."

The Bank of Korea is likely to accelerate its rate-cut cycle to boost the ailing economy, which would negatively impact local lenders’ profitability, Fitch Ratings projected.

“We did see a couple of years of rising interest rates, resulting in stronger profitability for the Korean banking system. The cycle itself has turned and now is going into the downside,” he said.

After reaching the peak of its monetary tightening cycle in January 2023, with the base rate standing at 3.5 percent, the BOK began its easing cycle in October 2024, bringing the rate down to its current 2.75 percent through three rate cuts.

“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.

Under such a prospect, in April, 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 in March.

“The Korean banking system has just come off its cyclical peak in terms of profitability,” he said. "The direction is for a reduction in net interest margins and for profitability to soften."

Cornish projected that the implications of the tariff policy would impact banks more strongly in the second half of this year and into next year.

“The first course of action for Fitch would be to signal the pressures through a change in the banking system sector outlook," he said.

In a recent commentary, Fitch Ratings suggested there is a greater risk of certain banking sector outlooks, including those of Korea, Taiwan and Thailand, moving from “neutral” to “deteriorating” due to US tariff policy.

"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.

"That does not necessarily mean that (the banks’ credit) ratings will change. It might be that our short-term view of the banking system sector outlook might change," he stressed.