Overseas expansion impacts Korean banks’ profits

Despite Korea's high GDP per capita, the current level suggests there's still room for improvement.

Fitch Ratings suggests limited upside potential for Korea's assigned bank operating environment (OE) score in the near term due to challenges like the recent property market downturn and increased social and regulatory pressures. 

These factors are expected to impact profitability, along with underlying issues such as high private sector leverage, demographic ageing, and Korea's export dependence.

The implied bank OE scores, determined by GDP per capita and Fitch Solutions' BMI Operational Risk Index, are anticipated to move to the 'aa' category from 'a' as GDP per capita surpasses $35,000, assuming Korea's Operational Risk Index ranking remains stable.

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However, actual assigned OE scores may include adjustments, and a higher implied OE doesn't necessarily mean a higher assigned OE score. 

Additionally, banks' expansion into overseas markets with weaker OEs may affect their individual blended OE scores.

Despite Korea's high GDP per capita, the current level suggests there's still room for improvement. The OE score also reflects a solid institutional framework.

Bank OE scores heavily influence assessments of banks' standalone Viability Ratings (VRs), with a higher OE score potentially leading to VR upgrades for major Korean banks and subsequent upgrades to their Issuer Default Ratings.