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/Yonhap

As non-performing loans (NPL) at the five major banks surpassed 7 trillion won, the NPL coverage ratio, which indicates loss-absorption capacity, fell to its lowest level in five years. Although the banks possess sufficient capital and earnings strength, the possibility of rising interest rates and expanding defaults among SMEs and households turning into new non-performing loans with a time lag is growing, leading to expectations that both earnings deterioration from provisioning and risk management burdens will expand in the second half of the year.

According to fact books and related data from the top five banks (KB Kookmin, Shinhan, Hana, Woori, and NH NongHyup) on July 28, the substandard or below loans (NPLs) of these banks stood at 7.4333 trillion won as of the end of the second quarter of this year. This represents the largest amount in eight years since the first quarter of 2018 (8.2143 trillion won).

Hana Bank recorded the largest increase in NPLs. In the second quarter, Hana Bank's NPLs surged by 474.6 billion won from the previous quarter to 1.8523 trillion won, which is interpreted as an impact of JoongAng Group's application for corporate rehabilitation. The market estimates Hana Bank's exposure (amount related to a specific enterprise) to JoongAng Group at around 300 billion won.

Woori Bank saw its soundness deteriorate, primarily in small and medium-sized enterprise (SME) loans. Its SME loan delinquency rate rose by 0.14 percentage points from the previous quarter to 0.75%, recording the highest figure among the five major banks. Consequently, NPLs in SME loans alone increased by 132.1 billion won.

On the other hand, the NPL coverage ratio, which reflects banks' loss-absorption capacity, dropped to 151.2%, falling to its lowest level since the second quarter of 2021 (153.5%) during the COVID-19 pandemic. By bank, Hana Bank posted the lowest figure among the five major banks at 100.35%, while Woori Bank experienced the largest drop, falling 28.2 percentage points from the previous quarter to 132.9%. In contrast, KB Kookmin Bank rose nearly 30% from the previous quarter to 197.3%, showing an NPL coverage ratio close to 200%.

With non-performing loans increasing while loss-absorption capacity weakens in the banking sector, alongside a prolonged high-interest rate regime, the burden of soundness management in the second half of the year is expected to grow. Earlier on July 16, the Bank of Korea raised the base interest rate from 2.50% to 2.75% and stated the need to maintain an interest rate hike stance. Analysts suggest that if interest rate increases persist, interest burdens on individual and corporate clients will increase, highly likely leading to a rise in new non-performing loans.

In particular, the sharp increase in precautionary loans, the stage immediately preceding non-performing loans, is also cited as a burden factor. Precautionary loans at the five major banks in the second quarter reached 10.2176 trillion won, up 901.5 billion won from the previous quarter, surpassing the 10 trillion won mark. Precautionary loans refer to bank loan receivables delinquent for more than 1 day but less than 3 months, classified as potential non-performing loans. As precautionary loans increased even at KB Kookmin Bank and Shinhan Bank, where the increase in NPLs was relatively small, concerns are raised that soundness indicators could further deteriorate if high interest rates continue.

Son Jae-seong, a professor of accounting at Soongsil University, said, "Even at current interest rates, working-class citizens and SMEs are struggling to hold on, and if rates rise further, default rates will increase significantly," adding, "Even without additional hikes, personal rehabilitation filings are expected to increase substantially by the end of the year under current rate conditions."

                                                                                                             Chae Jong-il