Here's why South Korean banks' profiles are improving

The operating environment has become less challenging.

According to Fitch Ratings, South Korea’s robust trade surplus is driven by exports, particularly in information and communication technology (ICT), petrochemicals and autos, which have supported the economy while weaker sectors, like shipbuilding and shipping, underwent restructuring since 2009. Exports, led by ICT and petrochemicals, have picked up again since 4Q16. Domestic political uncertainties since 2H16 have subsided now after the presidential election in May 2017.

Here's more from Fitch:

Improving Governance: Fitch Ratings expects corporate governance and transparency in Korea to be gradually enhanced, following the impeachment of the former president in 1Q17 and the implementation of the Improper Solicitation and Graft Act in 3Q16. Although the new administration’s financial policy agendas have yet to be formally announced, we expect the banks’ lending to be more prudent and market-driven than under the previous administrations.

Modest Risk Appetite: The system’s risk appetite has moderated in recent years, and Fitch expects the trend to continue. Most banks have loan growth plans at around the country’s nominal GDP growth. Low risk-weighted segments, such as households, self-employed individuals and property leasing sectors that typically are secured with collaterals, are likely to lead credit growth. We believe the banks are keen to expand overseas to improve margins, but expect expansion to be on a small scale with a focus on south-east Asia.

Stable Economy Supports Asset Quality: Strong employment, low interest rates and the role of the policy banks in stabilising the system, restructuring troubled industrial sectors and supplying credits when the commercial sector falls short, should continue to support sound performance of the commercial banks’ loans. The large share of prime borrowers with sufficient collateral and a benign property market are likely to ensure the stable performance of banks’ household loans, even though households’ debt servicing ability is under pressure nationally.

Weak but Improving Profitability: Interest margins have stabilised since the last policy rate cut in 2Q16. Fitch believes rates are now at the bottom of the cycle. Commercial banks’ credit costs have stabilised after turning more profit-driven in their exposures to weak or ailing industrial sectors since 2012. Several banks have cut their staff size to gain more efficiency.