South Korean banks to raise lending bar further in Q3

South Korean banks are poised to make borrowing more difficult in the third quarter, as indicated by a projected decline in their loan attitude index to -7. This marks the sixth consecutive quarter of tightening lending conditions, signaling a sustained increase in the hurdles for borrowers.

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The bank loan attitude index has been negative for six consecutive quarters since the second quarter of last year. This means that the threshold for loans continues to rise.

The Bank of Korea attributes this trend to the government's persistent focus on managing household debt. Despite the anticipated tightening, loan demand is expected to grow. The composite loan demand index stands at 17, suggesting continued demand, though lower than the previous quarter.

Specific segments show differing demand trends. While demand for household housing loans, including mortgages and jeonse loans, is expected to decrease due to regulations and rising interest rates, demand for general household loans, such as personal loans and overdrafts, is predicted to rise. This increase is driven by needs for living expenses and stock market investments.

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The household debt management policy is continuing.

Corporate loan demand is also forecast to increase for both large and small to medium-sized enterprises. This is attributed to companies seeking liquidity amid domestic and international uncertainties and rising corporate bond yields. The yield on 3-year corporate bonds (AA grade) rose from 3.47% at the start of the year to 4.38% by the end of June.

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The demand for general household loans is increasing due to demand for living expenses and stock market investments, while housing-related loans are expected to decrease due to regulatory strengthening and interest rate hikes.

Credit risk is a growing concern across the financial sector. The composite credit risk index stands at 22, with increases anticipated for large corporations, SMEs, and households. The Bank of Korea cited ongoing uncertainties in the Middle East and the potential for vulnerable households to struggle with debt repayments as key factors contributing to this outlook. Non-bank financial institutions are also expected to tighten lending, with most sectors anticipating increased credit risk.

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The increase in corporate loan demand is attributed to the demand for liquidity due to domestic and external uncertainties and the rise in corporate bond interest rates.