Rising Delinquencies and Bigger Provisions Cloud South Korean Banks’ Profits

Rising loan delinquencies and heavy provisioning are weighing on South Korea’s banks, even as they step up efforts to sell off bad loans. Analysts say asset-quality management is being tested because new delinquencies are increasing faster than banks can dispose of nonperforming loans.

According to the financial sector on Monday, banks sold 8.1 trillion won ($8.1 trillion) worth of NPLs last year.

Banks typically classify loans delinquent for more than three months as NPLs and, when recovery looks unlikely, sell them to securitization firms to manage delinquency ratios. But delinquency rates have been slow to fall despite aggressive NPL cleanups, as newly delinquent loans are growing faster.

Data from the Financial Supervisory Service showed the delinquency rate on won-denominated bank loans stood at 0.50% at the end of last year, the highest since the end of 2015 (0.58%). The corporate-loan delinquency rate rose to 0.59%, up 0.09 percentage points from a year earlier.

With banks expected to expand corporate lending this year under a “productive finance” policy push, they are likely to build additional provisions. NPL sales aimed at maintaining asset quality could also increase. NPL sales in the first half are estimated at 4 trillion won, and the annual total is expected to exceed last year’s level.

A larger volume of NPL sales can also cut net profit. When bad loans are sold below book value, banks record losses equal to the discount. Some in the industry warn that a full-scale push into corporate lending starting this year could lead to a stronger profit hit in coming years as NPLs rise.

“NPL volumes won’t surge immediately, but they could gradually increase in a few years due to factors such as a prolonged economic slowdown,” a financial industry official said. “If net profit falls as a result, it could disrupt value-up plans and business strategy.”

Other pressures on earnings are also growing, including fines tied to equity-linked securities and contributions to the Korea Inclusive Finance Agency. Fines for five banks that sold ELS — KB Kookmin, Shinhan, Hana, NH NongHyup and SC First Bank — are expected to be finalized at about 1.4 trillion won on Tuesday. As of the end of last year, KB Kookmin Bank had booked 263.3 billion won in provisions for the ELS fines but will need to add more than 500 billion won. Shinhan Bank and Hana Bank set aside 152.7 billion won and 92.0 billion won, respectively. The provisions are expected to be recorded as nonoperating expenses, weighing on net profit.

From the second half of next year, banks will no longer be allowed to include statutory costs — such as reserve requirements, deposit insurance premiums and contributions to the Korea Inclusive Finance Agency — in the add-on spread used to calculate lending rates, adding to pressure on earnings.

“If additional real estate rules are introduced, such as banning loan extensions for owners of multiple homes, borrowers could leave and banks could lose growth opportunities,” another financial industry official said. “Capabilities such as corporate analysis systems and long-term delinquency management will determine survival.”