Moody's upgrades outlook for S. Korean banking system

"The outlook change reflects our assessment that the overall creditworthiness of Korean banks will be stable over the next 12-18 months," the global ratings agency said in a report released on Friday. "Stronger economic growth in Korea has resulted in an improved operating environment for banks."

The decision came after South Korea's central bank raised the key interest rate from a record low on Nov. 30, for the first time in more than six years, amid signs of an economic recovery.

As part of efforts to rev up the domestic economy, the government has proposed the largest increase in public expenditure in nine years, which will be funded largely with increased tax revenue.

"Expansionary fiscal policy by the new government, coupled with increasing exports, ample liquidity and improving consumer sentiment, will support a stable operating environment for Korean banks over the next 12-18 months," it said.

In the long term, structural issues remain, Moody's said, pointing to the need for corporate sector restructuring, a rapidly aging population and rising household debt.

"How the Korean government addresses these challenges will shape the operating environment of Korean banks in the long run, and policy measures can have a negative impact on banks," it said.

The credit agency said a "technology-driven disruption" to the sector could also pose long-term challenges to traditional banks following the launch the nation's first Internet only-bank, K-Bank, in April.

K-Bank held just 0.04 percent of local currency loans as of June, but Moody's expected its market share could grow rapidly in the coming years as more bank customers are shifting to digital channels. (Yonhap)