Korea’s top lenders face delicate balancing act: Bloomberg Intelligence analyst

South Korea’s top lenders — KB, Shinhan, Hana and Woori — are being pushed into an increasingly delicate balancing act: expanding policy-driven lending to support economic growth while preserving capital strength and boosting shareholder returns, a Bloomberg Intelligence analyst said.

Under “productive finance,” a policy priority of the Lee Jae Myung administration, the parent groups of the four banks have pledged to channel a combined 345 trillion won ($240 billion) into productivity-enhancing investment over the next five years, shifting lending away from traditional household loans toward corporate and startup financing.

That shift is likely to place incremental pressure on banks’ balance sheets, said Rena Kwok, a senior credit analyst at Bloomberg Intelligence, in an interview with The Korea Herald in Seoul on Tuesday.

“It is a very big push,” Kwok said, noting that productive finance can “eat into” banks’ capital as it steers lending toward higher-risk segments. “Corporate and growth lending carries more risk than household loans.”

While Korea’s major banks currently have strong capital buffers, Kwok warned those buffers could gradually erode as policy financing expands, particularly as small-business loan delinquencies remain at multiyear highs.

“This marks a clear shift away from banks’ traditional focus on safer household lending,” she said. “They are being nudged toward productive finance, which increases pressure on both capital and asset quality over the medium term.”

Kwok stressed, however, that the risks are manageable if banks proceed cautiously. She expects lenders to take a gradual approach to scaling up productive finance, helping to dilute the impact on capital and credit metrics.

“The key will be how carefully banks manage risk-weighted assets as policy lending grows over the next few years,” she said.

Kwok added that Korea is not an outlier. Across Asia, banks are often expected to play a broader social role during economic slowdowns, supporting growth even when risks rise.

“In most countries, banks are major players in the economy,” she said. “When headwinds intensify, they are encouraged — even if not formally mandated — to support the broader economy.”

At the same time, Korea’s lenders face mounting pressure from shareholders. Their parent groups have pledged to raise dividends and expand treasury share buybacks to address long-standing valuation discounts — moves that also draw on capital.

“If profitability comes down slightly while the push for productive finance continues, banks will need tighter capital and risk management to ensure they can still meet shareholder return commitments,” Kwok said.

While the big four banks have posted record profits in recent years on the back of high interest rates, Kwok expects earnings momentum to ease as the policy rate declines, moderating net interest income this year.

“Ultimately, banks have committed to returning more capital to shareholders while also supporting policy priorities,” she said. “Managing profitability and asset risk under those conditions is a very fine balance.”