Loans classified as "estimated loss" — the weakest asset-quality grade and the portion banks consider effectively unrecoverable after accounting for collateral and expected recoveries — totaled 1.21 trillion won ($849 million) at KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank at the end of June.
The total increased 26.6 percent from 956.7 billion won a year earlier and 18.1 percent from 1.03 trillion won at the end of March, reaching its highest level since the second quarter of 2019, when the balance stood at 1.25 trillion won.
Under South Korea's five-tier asset-quality classification system, loans are graded as normal, precautionary, substandard, doubtful and estimated loss.
The estimated-loss category includes loans deemed effectively unrecoverable, typically involving borrowers in default, liquidation, bankruptcy or prolonged delinquency after collateral values and other recoveries have been taken into account.
Estimated-loss loans, together with substandard and doubtful loans, are classified as non-performing loans, making them one of the clearest gauges of credit deterioration within banks' loan books.
Corporate borrowers accounted for the bulk of the deterioration.
Estimated-loss corporate loans rose 26.3 percent from a year earlier and 18.5 percent from the previous quarter to 980.9 billion won, representing about 81 percent of the five banks' total bad-loan balance. The concentration suggests credit quality is deteriorating far more rapidly among businesses than households despite concerns over household debt.
Estimated-loss household loans also increased, rising 28.1 percent on year to 229.8 billion won, although they remained a much smaller share of the total.
Among individual lenders, Shinhan Bank held the largest estimated-loss balance at 342.1 billion won, up 48 percent from a year earlier. NH NongHyup Bank followed with 265.5 billion won, while KB Kookmin Bank reported 248.9 billion won.
Woori Bank recorded the fastest annual increase, with its balance surging 80.9 percent to 171.6 billion won, followed by Hana Bank, where estimated-loss loans climbed 55.1 percent to 182.8 billion won. NH NongHyup was the only lender to report a year-on-year decline, although its balance increased from the previous quarter.
Signs of weakening credit quality were also emerging earlier in the lending cycle.
Loans classified as precautionary — borrowers showing signs of financial weakness but not yet classified as non-performing — increased to 10.22 trillion won at the end of June, up 5.7 percent from a year earlier and 9.7 percent from three months earlier. Hana Bank reported the largest precautionary-loan balance at 2.48 trillion won.
Borrowers in the precautionary category can be downgraded to substandard or worse if repayment conditions continue to deteriorate, including when delinquencies extend beyond 90 days.
The simultaneous increase in precautionary and estimated-loss loans suggests that credit stress is spreading through multiple stages of banks' asset-quality classifications rather than being confined to already distressed borrowers.
The deterioration comes before the Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75 percent on July 16 to curb persistent inflation and financial stability risks. That means the latest monetary tightening has yet to be reflected in second-quarter bank balance sheets.
The buildup in bad loans leaves banks balancing stronger interest income against rising credit costs as higher borrowing rates increasingly strain weaker corporate and household borrowers.
AJP Takeaway:
- Bad loans at South Korea's five largest banks reached a seven-year high in the second quarter.
- Corporate borrowers accounted for more than 80 percent of the increase, signaling mounting stress in business lending.
- The deterioration occurred before the Bank of Korea's July rate hike, suggesting asset quality could come under further pressure in coming quarters.
Copyright ⓒ Aju Press All rights reserved.