SOUTH KOREA: An Introduction to Banking & Finance

South Korea’s banking and finance industry remained relatively active throughout 2024, with real estate financing accounting for the largest share of borrowings, followed by acquisition financing. While overall M&A activity was sluggish in 2023 and the first half of 2024, the market saw a notable upturn in deal volume during the latter half of the year. M&A transactions spanned various industries, including semiconductors, biopharmaceuticals, retail, car rentals and waste management.

Domestic banks continued to maintain sound capital buffers and remained dominant in the South Korean loan market, although alternative credit providers, such as private equity and collective investment vehicles, have become increasingly important in filling gaps left by traditional financial institutions. Foreign credit funds have also shown increasing interest in participating in the South Korean lending market. However, this participation requires careful consideration of existing regulatory requirements, such as the lending business licence requirement under the Lending Act of Korea and foreign exchange transaction regulations that limit foreign currency borrowings by domestic entities.

Given South Korea’s heavy reliance on exports, it is likely that ongoing geopolitical shifts and high interest rate environment will adversely affect South Korea’s exports, investment activities and the overall economic performance of the South Korean economy. As a partial measure to stabilise the economy in light of these developments, the Bank of Korea has recently lowered its key interest rate consecutively in October and November 2024 to 3.00% to ease pressure on potential loan defaults.

The Presidential impeachment in December 2024 added to political uncertainty, with potential ramifications across the financial sector. While the immediate economic impact has been limited, concerns over policy continuity and investor confidence remain significant. The acting President is expected to prioritise maintaining stability to reassure investors until a resolution – whether reinstatement or removal of the existing President – is reached. As an example, the Ministry of Finance and Economy of Korea has recently announced that it would increase the amount of foreign currency loans that may be borrowed by domestic corporations from foreign exchange banks in South Korea for use in connection with facilities. The measure is intended to enhance liquidity of the Won, which has reached a 15-year low as of December 2024. However, delays in policy implementation and regulatory decisions appear likely under current political circumstances, and these delays could pose challenges for South Korean market players in the banking and finance industry in 2025.

Amid a sluggish economy, the growth in non-performing loans (NPLs) has been closely monitored by financial authorities and market players. South Korea’s NPL ratio currently stands at 0.4%, reflecting a slight increase since the start of the year. The NPLs are mostly concentrated in the construction and real estate sectors, which have been adversely impacted by substantial cost increases in construction in the last few years. Despite the increase, the current NPL ratio of 0.4% remains relatively modest when compared to the levels seen during the Lehman crisis in South Korea, and the NPL market has not shown significant activity. However, rising economic headwinds stemming from domestic political uncertainty and geopolitical challenges could lead to increased NPL market activity in South Korea in the future.