Fitch Says Korea Stock Volatility Poses Limited Near-Term Credit Risk

Fitch Ratings Report

Fitch Ratings said recent volatility in South Korea’s stock market is having only a limited effect on short-term credit risk, even as the Kospi extends unprecedented swings. Last month, circuit breakers — 20-minute trading halts — were triggered for two consecutive days in both the Kospi and Kosdaq markets for the first time on record, as sharp gains and losses repeated.

On August 5, Fitch said South Korea’s solid economic conditions and prudential safeguards across the financial sector are helping maintain financial-market stability.

Fitch identified consumer sentiment, housing-market activity and financial companies’ earnings as the main channels through which stock-market volatility could affect credit risk.

The firm said prolonged weakness in share prices would weigh more on housing demand and sentiment than on consumption. It cited Bank of Korea research showing that when stock prices rise by 10,000 won, the wealth effect from stock gains used to fund consumption is only 1.3%. The central bank estimated that households without homes invested 70% of profits from stock investing into home purchases. The findings were based on an analysis of consumption and asset data from 2011 to 2024, compared with 3% to 4% in Europe and the US.

Fitch said securities firms face the clearest near-term pressure. Even so, it found no signs that current market volatility is leading to meaningful deterioration in their financial condition. Brokerages also entered the latest market correction with stronger profitability. Most securities firms that reported first-half earnings posted net income that was about double a year earlier, helped by higher brokerage commissions and interest income from margin lending. Fitch said retained earnings accumulated over the past two years should help absorb weaker profit and potential losses.

For banks, Fitch expects the short-term impact to show up mainly in slower business growth and weaker profitability. Banks have relatively low direct exposure to stock-market volatility, it said. Fitch also found no clear evidence that households are sharply increasing leverage to invest in equities. Household lending growth at banks remained moderate at 3.8% in January through May from a year earlier. Banks’ main exposure comes not from the stock market itself, but through housing and household credit conditions, Fitch said.

Fitch also said South Korea’s economy remains supportive. First-half gross domestic product data suggested growth may come in slightly above Fitch’s June forecast of 2.6% for the full year. Strong exports and investment led by semiconductors, driven by rising demand for artificial intelligence, helped sustain growth, while consumption also remained solid. The Bank of Korea last month raised its benchmark interest rate by 25 basis points to 2.75% from 2.50%, citing stronger-than-expected growth. The move marked a return to a tightening stance for the first time since January 2023, after three and a half years.

South Korea’s stock market, meanwhile, has been hit by swings even more severe than during the financial crisis. The Kospi tumbled 33% last month, surpassing its biggest monthly decline during the Asian financial crisis, when it fell 27% in October 1997. Even so, global investment banks have maintained a constructive view. Goldman Sachs said on August 4 that the market is pricing in a more negative outlook for fundamentals than justified and kept its 12-month target at 12,000.

Oh Jung-min, Hankyung.com reporter blooming@hankyung.com