International rating agency Fitch Ratings diagnosed recently that the short-term credit risks posed by volatility in the South Korean stock market are limited.

On the 5th local time, Fitch diagnosed that South Korea's solid economic conditions and financial sector-wide safety guards are supporting financial market stability.

It cited consumer sentiment, the housing market, and financial institution profitability as the main channels through which volatility is transmitted.

In particular, it viewed that the housing market and sentiment could serve as more significant transmission channels than direct impacts on consumption.

According to Bank of Korea research, only about 1.3% of stock investment gains flow into consumption, making the "wealth effect" limited, whereas about 70% of profits earned by non-homeowners from stocks eventually flowed into real estate purchases.

Accordingly, it analyzed that prolonged stock price weakness could place a greater burden on housing demand and sentiment rather than consumption.

Securities firms were pointed out as facing the most prominent pressure in the short term.

However, Fitch assessed that current volatility does not indicate a substantial deterioration in financial structures.

It stated that credit margin risks are at a manageable level because collateral liquidation mechanisms are operating normally and maintenance margin requirements are mitigating risks.

Above all, securities firms entered this correction phase with strengthened profitability.

Most securities firms that announced their first-half earnings saw their net profit roughly double compared to the previous year due to increases in brokerage commissions and credit margin interest income.

Fitch projected that the retained earnings accumulated over the past two years will help absorb profit declines and potential losses.

Banks showed relatively low direct exposure to stock market volatility.

There is still no clear evidence that households are significantly increasing leverage for stock investments.

The growth rate of household loans in the banking sector was a moderate 3.8% year-on-year from January to May of this year.

However, the primary exposure of banks is through housing and household credit conditions rather than the stock market, and the Bank of Korea has previously pointed to the steep growth of housing prices and household debt as persistent financial stability concerns.

Insurers were cited as the sector least affected within South Korea's financial industry.

With direct stock exposure remaining below 0.5% of assets under management and below 2.3% of capital, the impact of market declines on solvency is limited.

Fitch assessed that South Korea's economic growth momentum remains favorable.

Citing stronger-than-expected growth momentum, the Bank of Korea raised the benchmark interest rate by 25 bps to 2.75% last month.

With exports and investment continuing a strong growth trend centered on semiconductors and consumption showing a sound trajectory, first-half GDP indicators suggest the possibility of slightly exceeding Fitch's annual growth forecast of 2.6% presented in June.

(Photo: Provided by Fitch Ratings, Yonhap News)