Korean Banks Struggle to Expand Productive Finance Amid Household Loan Focus

A recent analysis indicates that South Korea's major commercial banks are maintaining a portfolio heavily weighted toward household loans, limiting their ability to expand into productive finance such as corporate lending.

On June 20, Kim Seok-ki, a senior researcher at the Korea Financial Research Institute, revealed findings from a report titled 'Asset Structure of Domestic Banks and Challenges in Expanding Productive Finance.' The report compares the asset structures of South Korea's four largest banks (KB Kookmin, Shinhan, Hana, and Woori) with those of JPMorgan Chase in the United States and Mitsubishi UFJ Financial Group (MUFG) in Japan.

The analysis found that household loans accounted for an average of 27.8% of the total assets of South Korea's four major banks. This figure is nearly double that of JPMorgan Chase, which stands at 14.5%, and significantly higher than MUFG's 3.1%.

In contrast, the proportion of ultra-low-risk assets, such as deposits, central bank reserves, and government bonds—assets with virtually no risk of principal loss—was much higher among foreign banks. JPMorgan's ultra-low-risk assets made up 29.2% of its total assets, while MUFG reported 41.8%. In comparison, the average for South Korea's four major banks was only 11.8%.

Ultra-low-risk assets help reduce risk-weighted assets (RWA), thereby alleviating capital regulation burdens. This allows banks to manage higher-yielding risk assets, such as corporate loans, project financing, and investment banking, providing them with the capacity to expand in these areas. This is a key factor enabling large foreign banks to actively grow their corporate and investment finance operations.

However, South Korean banks face a relatively higher burden of risk-weighted assets due to their heavy reliance on household loans. With recent regulatory measures aimed at managing household debt becoming stricter, there is a pressing need for banks to seek growth through increased corporate finance and investment in new industries. Yet, the current asset structure poses limitations on their ability to take on a more active role.

Kim emphasized, "The concentration of household loans in domestic banks can act as a constraint on the expansion of productive finance. It is necessary to consider a 'Korean-style barbell portfolio' strategy that increases the proportion of safe assets while also expanding the management of high-yield assets in the medium to long term."