(Refiles to fix literal in paragraph three) (Updates with policymakers' comments, details, shares)
SEOUL, July 25 (Reuters) - South Korean banks are facing growing legal and reputation risks over suspicions that lenders had fattened their profits in recent years through unfair practices, ratings agency Fitch said on Wednesday.
The warning came as the head of the anti-trust agency confirmed to lawmakers that it had opened an investigatiion into nine banks and 10 brokerages last week after media reports raised suspicion that they may have colluded in keeping lending rates unfairly high.
Share prices in banks and their holding companies fell more than 1 percent, with the sector facing its fifth losing session in six, on concerns the investigation could hurt their profitability, or lead to punitive actions such as fines.
Local media have reported that at least one civilian group was preparing for a class suit against banks but no action has been taken yet.
"A growing focus on consumer protection in Korea has increased legal and reputational risks for banks, and will weigh on the long-term profitability of the sector," Fitch Ratings said in a statement, while noting it was too early at this stage to ascertain the financial implications for indivduaul banks.
The Fair Trade Commission investigated the 19 financial companies, all local companies but Standard Chartered PLC's local unit, on suspicion of collusion in keeping the benchmark three-month money market rate unfairly high.
The certificate of deposit rate has failed to reflect falling market interest rates for a long time, for instance staying at a uniform 3.54 percent for three months even as the same-maturity treasury bond yield fell 19 basis points.
"We judged that the CD rate's movements for recent several months were different from the pattern for other bond yields," Kim Dong-soo, head of the commission, told a parliamentary committee session which was broadcast live on the Internet.
The head of the country's central bank told another parliamentary committee session that the impact would be very large if a collusion on the CD rate was confirmed, adding there would also be an impact on the international transactions.
"Derivatives transactions (involving the CD rate) amounted to 4,500 trillion won ($3.93 trillion)," Bank of Korea Governor Kim Choong-soo said of statistics released by the country's financial regulator recently.
The Seoul stock market's banking sector sub-index fell 1.2 percent by 0321 GMT, underperforming the broader market's 0.8 percent fall. It has lost 8 percent since word of the rate probe surfaced on July 17, far more than the broader market's 2.3 percent decline.
The country's state audit bureau said in a report this week that banks made unfairly large profits by failing to lower lending rates in line with reductions in the policy interest rate during the 2008-2009 global crisis.
The Board of Audit and Inspection neither identified individual banks nor took any punitive action on them, but called for the financial regulatory agency to toughen supervision on the business practices at banks.
Fitch said these risks were negative for banks' credit profiles, although adding such challenges would ultimately help South Korean banks to become more robust by strengthening internal controls and compliance functions.
Mortgage lenders in the country are already facing class action suits over certain charges. ($1 = 1146.1750 Korean won) (Reporting by Choonsik Yoo; Additional reporting by Christine Kim and Se Young Lee; Editing by Kim Coghill)