Ratings agency Moody's downgraded the outlook on the South Korean banks' credit rating to "negative" from "stable" Thursday, predicting their asset quality and profitability will weaken.

The agency released a report on the Korean banking system and lowered the credit ratings outlook for the local banking sector to "negative."

In its assessment, Moody's anticipated a deterioration in the business environment for domestic banks over the next 12 to 18 months, driven by heightened competition for loans arising from refinancing platforms and internet banks.

Moody's highlighted the worsening net interest margin, a key profitability indicator for banks, attributing it to a contraction in private consumption resulting from high interest rates.

The agency also identified rising delinquency rates as another challenge for banks. While the default rate for loans at local banks stood at a reasonable 0.38 percent at the end of last year, Moody's anticipated an increase to 0.5 percent in the next year or so, citing defaults in pandemic-related and real estate loans, as well as a possible spillover of real estate project financing risks into the non-banking financial sector, as primary sources of asset risk.

A "negative" outlook implies potential credit rating downgrades for companies in the forthcoming year. Should ratings decline, local banks may need to issue dollar-denominated bonds at elevated interest rates.

Furthermore, interest rates on previously issued bonds could be subject to adjustment. Korea achieved a record-high annual issuance of foreign currency-denominated bonds last year, totaling 53 billion won ($40 million) in total volume.