Korean banks may fall victim to US-China trade feud

SEOUL, Aug 29, 2019, The Korea Times. The intensifying trade tensions between the United States and China will likely have a negative impact on Korea’s banking industry by hurting their asset quality and profitability, according to global credit ratings agencies, Wednesday, reported The Korea Times.

They said the nation’s banks may face downward pressure on their credit profiles, because a possible Chinese slowdown ― mainly caused by the planned U.S. tariffs ― would have knock-on effects on other Asia-Pacific economies, including Korea.

“Our economic model suggests Korea’s economy would slow by 2 percentage points in 2020 in this scenario, which would push it very close to recession, and there would be little recovery in the following year,” Dan Martin, regional credit officer at Fitch Ratings’ credit policy group, told The Korea Times.

“That would create asset quality pressures which would be stronger than in most other markets around the region.”

He recently analyzed the effect on Asia-Pacific banks by using his company’s hypothetical scenario that models the impact of a sharp Chinese economic slowdown sparked by the U.S. imposing additional 25 percent tariffs on made-in-China products worth $300 billion.

According to his analysis, Korea ― along with Hong Kong, Singapore and Taiwan ― is among countries that would be hit the hardest through macroeconomic knock-on effects, given its close trade links with mainland China.

“The severity of the economic slowdown in Korea under the hypothetical scenario ― a drop of 2 percentage points in GDP to 0.6 percent in 2020 ― is not something Korea has seen for the last two decades,” Chang Hea-kyu, senior director at Fitch Ratings’ financial institutions, told The Korea Times.

“Any panic Korea experienced was relatively short in the past. The major commercial banks said their capital position would decline by about 200 basis points to 300 basis points or so, if they apply the worst-case scenario ― mainly with attributes from the 1997-1998 Asian Crisis ― for their stress tests.”

S&P Global Ratings warned that Korean banks may experience rising credit costs due to the U.S.-China trade war, as well as Korea’s feud with Japan over export controls.

“Unfavorable economic conditions ― such as the intensifying trade tensions between the U.S. and China, as well as between Korea and Japan, and a slowdown in the domestic economy ― could push up credit costs,” S&P Global Ratings analyst Kim Dae-hyun said in a recent risk assessment report on Korea’s banking industry.

“The key downside risk to our base-case credit loss estimates is a potential slowdown in exports. This could be caused by external risks such as China’s economic conditions and the intensifying trade tensions between the U.S. and China, as well as between Korea and Japan, which may slow down Korea’s growth.”

By Park Jae-hyuk