South Korea's banking sector is expected to continue a gradual growth trend in 2027, led by lending to large companies. Profitability improvement is likely to be limited as net interest margin (NIM) stagnates amid higher funding rates and intensified loan competition. With rising interest rates and widening growth disparities by industry increasing default risks in vulnerable sectors, banks are also expected to face heavier burdens in asset quality management and capital operations.

At the Korea Institute of Finance's "2027 Economic and Financial Outlook Seminar" on Nov. 10, Kim Seok-ki (김석기), head of the banking and financial holding company research unit, forecast that the banking industry in 2027 would continue asset growth centered on corporate lending and a recovery in non-interest income, but that pressures would persist in profitability and soundness.

According to the institute's analysis, domestic banks' total loan growth rate in the first half of this year was 4.4 percent from a year earlier, slightly above 4.1 percent at end-2025. Within household lending, growth in mortgage loans slowed, while the growth rate of unsecured credit loans rebounded. Corporate lending growth expanded, led by large companies.

Net profit for the first half was 13.8 trillion won, down 6.4 percent from a year earlier. Interest income increased on growth in interest-earning assets and NIM, but securities-related losses from rising market rates and higher credit costs weighed on profitability. In particular, securities-related profit and loss swung to a 2.5 trillion won loss from a 3.2 trillion won profit a year earlier, and non-interest income fell 43.4 percent to 2.9 trillion won.

Gradual growth led by large-company loans; NIM seen stagnating

Kim expected bank lending next year to rise slightly, led by large companies, as overall caps on household lending remain in place. He cited continued policies to curb household lending, including higher risk weights for mortgage loans, alongside efforts to ease burdens in calculating risk-weighted assets (RWA) to encourage expansion in corporate lending.

He also raised the possibility that as banks compete for a limited pool of high-quality companies, corporate loan spreads could narrow and concentration risks to specific borrowers could increase.

Funding conditions were also cited as a burden. Banks face pressure to raise deposit rates as non-bank financial institutions raise their deposit rates, while the possibility of funds moving into capital markets remains.

As a result, NIM next year is expected to stagnate after rebounding early in the year, as higher funding rates and narrower corporate loan spreads take effect. Overall interest income is expected to edge up as asset growth centered on corporate lending partially offsets those pressures.

Regulation that limits reflecting legal and policy costs in loan add-on rates was also cited as a factor weighing on profitability. The analysis said the impact would vary depending on the scope of loans subject to the rule, but could accumulate gradually through new loans and renewals.

Non-interest income is expected to recover on base effects from this year's weakness and a moderation in the rise in market rates. With normalization of securities-related profit and loss expected, fee and trust income were also projected to show a gradual increase.

Policy-driven cost increases were seen adding to pressure on profitability, including a higher education tax rate, an expanded deposit insurance cap, a higher contribution rate to the Korea Inclusive Finance Agency, and differentiated contribution rates for the Housing Finance Credit Guarantee Fund.

46.8 percent of lending tied to vulnerable sectors; regional banks face heavier strain

Banks' asset quality is expected to remain difficult to improve next year. Domestic banks' delinquency ratio and non-performing loan ratio shifted into an uptrend after bottoming out in mid-2022, and stood at 0.56 percent and 0.63 percent, respectively, as of end-June this year.

Risk factors cited included that corporate performance is improving in some industries such as semiconductors, while difficulties persist in vulnerable sectors including construction, petrochemicals, metal products, wholesale and retail, and real estate.

Kim said the share of corporate loans by deposit-taking banks to those five industries, classified by the Bank of Korea as vulnerable or caution sectors, stands at 46.8 percent. He said delinquency rates in those sectors have been rising since 2022, making soundness management more important in a period of rising rates.

Worsening asset quality at regional banks was also presented as a key task. Recent data show delinquency and non-performing loan ratios at regional banks deteriorating more than those at major banks, while provisioning coverage is also falling. In particular, the analysis said regional banks' provisioning coverage has dropped below 100 percent since the end of last year.

On capital ratios, valuation losses on fair value through other comprehensive income (FVOCI) financial assets driven by higher interest rates are expected to weigh on the common equity tier 1 (CET1) ratio. Kim said the impact from a decline in capital ratios is expected to be relatively limited, as next year's benchmark rate increases are expected to be smaller than this year's.

Risk-weighted asset growth from expanding corporate lending and the introduction of a household-sector countercyclical buffer were cited as factors that could increase capital burdens for banks.

Kim estimated that, considering the scale of risk-weighted assets at the five major banks, if the household-sector systemic risk buffer is applied at the same cap of 1 percent, additional capital of up to 10.5 trillion won could be required.

Task of expanding productive finance; need to respond to AI and digital bank-run risks

As mid- to long-term growth strategies for banks, improvements in credit assessment systems and diversification of business portfolios were presented.

Kim said that amid intensifying loan competition focused on large companies and high-quality borrowers, relying only on approval or rejection based on existing collateral and credit ratings could limit funding for growth companies. He stressed the need to expand productive finance by measuring risks and setting appropriate interest rates based on technological capabilities and future cash flows.

There was also a cautious assessment of expanding performance in the non-bank units of financial holding companies. Net profit for the four major financial groups in the first half of this year was 11.3 trillion won, up 9.8 percent from a year earlier, but most of the increase was attributed to contributions from securities subsidiaries, the analysis said. It said those contributions could shrink if stock market conditions reverse, given the market-linked nature of the earnings.

New risks from digital transformation were also raised. The analysis said that if AI agent-based financial services expand, lowering account-switching costs and speeding up deposit flows, banks' deposit bases could become unstable.

Kim warned that external threats such as AI-based hacking could increase banks' operational risks and, if they lead to a decline in customer trust, could trigger a digital bank run at a faster pace than before. He stressed that banks should strengthen cyber security investment, risk governance and internal control systems together.

He also suggested that, in preparation for institutionalisation of a won-based stablecoin, banks should proactively secure capabilities for custody of reserve assets, conversion between fiat currency and tokens, and anti-money laundering. He said banks also need to build new profit bases such as senior wealth management and investment advisory for retirement pensions.

Financial authorities warn of profitability slowdown; stress soundness management and productive finance

In the panel discussion that followed, participants maintained the outlook that banks' profitability improvement next year would be limited.

Jeong Hee-soo (정희수), head of Hana Financial Research Institute, said that despite economic growth, the economy as felt by banks is so weak that the banking industry is expected to be worse than in previous years. He said it would not be easy for profits to improve significantly even if the economy enters a period of rising interest rates.

Jeong said that with household lending regulations continuing, competition among banks to secure high-quality companies has intensified and pushed corporate loan margins down to historically low levels. He said that combined with a shift of funds to capital markets and burdens from funding costs, it would not be easy to expand interest income.

He said long-term fund flows into capital markets are expected to continue and that a sense of crisis in the banking sector is growing as competition with large securities firms intensifies.

On soundness, he expected the uptrend in delinquency and non-performing loan ratios driven by widening growth disparities across industries to continue next year.

The Financial Supervisory Service also focused on a slowdown in profitability next year and the need for soundness management. Hwang Jun-ha (황준하), director of banking risk supervision at the FSS, said banks' profitability has so far been relatively solid but is expected to slow overall next year.

Hwang said losses can occur in the process of selling non-performing loans, or sales may be difficult, and while banks can build sufficient provisions, banks feel burdens in provisioning for various reasons. He said the FSS is closely managing the situation and will focus on checking banks' provisioning status ahead of year-end closings.

The Financial Services Commission stressed that along with soundness management, the supply of funds to productive sectors such as small and medium-sized enterprises should continue.

Shin Jang-soo (신장수), head of the banking division at the FSC, said the financial sector has made significant efforts to meet social demands for productive and inclusive finance and has achieved results. He said financial authorities also pushed twice to rationalise capital regulations for banks, and quantitative analysis showed that, when converted into corporate lending, additional supply capacity of about 150 trillion won was secured.

He expressed concern that rising interest rates and growing domestic and external uncertainty are worsening difficulties for vulnerable borrowers, and that a bias in corporate lending toward large companies could worsen financing conditions for small and medium-sized firms.

Shin said banks' voluntary special contributions to supply funds are desirable in such circumstances. He said strengthening soundness management does not necessarily mean managing lending only around safe assets, and that it is important for banks to enhance their credit evaluation and loan screening capabilities.