Business nonperforming loans, or NPLs, rose by 1 trillion won from three months earlier to 15.2 trillion won at the end of June, accounting for the bulk of the banking sector's 18.9 trillion won in bad loans, according to the Financial Supervisory Service on Wednesday.
The NPL ratio for small and midsized businesses climbed to 0.92 percent from 0.88 percent.
“The increase in bad loans largely reflects prolonged weakness in the economy,” a senior official at the FSS's Bank Risk Supervision Department told AJP. “Higher interest rates have made it harder for borrowers to repay their debts.”
The official said, however, that it was premature to be alarmed.
“For problems in the banking sector to spill over into other financial sectors, banks themselves would have to deteriorate to a much more serious level,” he said. “We don't think we are at that point yet.”
The delinquency rate on won-denominated bank loans fell to 0.56 percent in June from 0.67 percent in May, according to FSS data released Aug. 21.
The regulator said the decline largely reflected banks' clearing of overdue loans at the end of the quarter rather than a meaningful easing in borrower stress.
The same pattern appeared in corporate lending.
The corporate loan delinquency rate fell to 0.68 percent from 0.84 percent in May, while the rate for small and midsized businesses declined to 0.82 percent from 1.00 percent.
“Banks are sufficiently capitalized,” the official said, adding that strong profitability gives them room to build reserves and absorb additional credit losses.
South Korean banks posted a combined net profit of 13.8 trillion won in the first half of 2026. Interest income rose 8.3 percent from a year earlier to 32.2 trillion won, according to FSS data released Aug. 24.
Banks also increased provisioning, with loan-loss expenses rising by 300 billion won to 3.5 trillion won.
Loan-loss reserves stood at 26.9 trillion won at the end of June, up 200 billion won from three months earlier.
The coverage ratio, however, fell to 142.9 percent from 150.4 percent at the end of March as bad loans increased faster than reserves.
The official said the lower ratio was not an immediate concern.
“Before 2020, a coverage ratio above 100 percent was generally considered healthy,” he said. “The ratio has fallen from unusually high levels in recent years, but the current level is still not a concern.”
Capital ratios also strengthened.
Banks' common equity Tier 1, or CET1, ratio — a key measure of their ability to absorb losses — rose to 13.62 percent at the end of June from 13.50 percent three months earlier, while the total capital ratio increased to 15.77 percent, according to FSS data released Monday.
All domestic banks remained well above regulatory requirements.
“Banks remain profitable, giving them room to absorb potential losses,” the official said.
AJP Takeaways
• South Korean banks' corporate NPLs rose by 1 trillion won to 15.2 trillion won at the end of June, while the NPL ratio for small and midsized businesses climbed to 0.92 percent.
• The FSS sees limited risk of corporate loan stress spreading across the wider financial system, citing banks' strong profitability, reserves and capital buffers.
• Banks held 26.9 trillion won in loan-loss reserves at the end of June, while their CET1 ratio rose to 13.62 percent, leaving them with substantial capacity to absorb additional losses.
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