South Korea's banking sector has enough buffers to weather industry-wide challenges but still should bolster its efforts to diversify profit and lower credit risks, a Standard & Poor's official said Tuesday.

The advice comes as local lenders strive to shore up profitability amid falling profit from interest while controlling the quality of their household lending, whose demand is soaring under the low-rate environment.

"While (the local banking sector) faces many risks, it also has sufficient buffers to endure. But efforts for profit diversification are insufficient compared with other countries," Naoko Nemoto, managing director at Standard & Poor's Ratings Japan said in a seminar.

"There is also a need to quickly deal with potential credit risk as it will become more difficult to solve such risks when the low-growth era takes off."

Nemoto said local lenders have built sturdy buffers by raising their core capital ratio, but with the net interest margin, a key gauge of profitability, trending lower, they should increase efforts to diversify profit sources.

"Until now, profit continued to rise without much effort as profit from mortgage lending was quite high. But this should be reconsidered, and more efforts for diversification should be sought," she said, noting the room for a rise in the portion of fee income.

Fee income accounted for about 15 percent of Korean lenders' profit, more than half that of Japanese lenders and also smaller than the 20 to 30 percent portion at banks in France, Germany and the United States.

The S&P official also stressed the need to gear up against potential credit risks.

"While the ratio of non-performing loans are at a low level, there are potentially many risks, such as private debt and falling competitiveness at exporters stemming from foreign exchange rates," she said.

A weakening yen is seen as a setback for local exporters who compete with Japanese manufacturers in the global market. Experts have recently cautioned that such an impact may become more significant once Japanese firms start using their increased profit on marketing and research and development.

Growing household debt is also among the potential risks lurking in the local finance industry, with household credit expanding at a record pace to 1.09 quadrillion won ($984 billion) as of end-December. (Yonhap)