Rising delinquency rates add concerns over banks' financial soundness

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 07:34

Markets

Rising delinquency rates add to concerns over banks' financial soundness

Posted : 2023-05-22 16:53

Updated : 2023-05-23 16:30

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Experts view crisis unlikely due to banks' solid capital reserve

By Anna J. Park

As more debtors are falling behind on their bank loan payments, concerns are growing over local banks' financial soundness. It is particularly worrisome that delinquency levels are projected to rise further in the latter half of this year, reflecting the effects of drastically soaring interest rates as well as the hiked amount of loans during the past three years amid pandemic shocks.

According to the banking industry, the average delinquency rate of five major banks ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― stood at 0.304 percent, as of the end of April. This is up by more than 11 percent from the end of March, when the average delinquency rate was 0.272 percent.

When compared to the average delinquency level of the five banks from the same month last year, it has risen by more than a whopping 63 percent. The average delinquency rate at the end of April last year stood at 0.186 percent.

Despite banks' efforts to keep their delinquency rates low by selling bad loans, it's been said that most banks' delinquencies have risen to record-high levels since 2020.

By loan entity, delinquency rates have increased for both households and corporations. Household loans are due mostly to excessive investment decisions on their real estate assets. Owners of mom-and-pop businesses are also estimated to be drawing a maximum amount of household loans to support their operating fees.

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Experts agree that the rising delinquency rates pose challenges to the local banking industry. They also say they expect the situation to deteriorate in the second half of this year, as it usually takes about a year for the shock of interest rate hikes to affect debtors' payment capability. Also the slated completion of various special financial supports during the pandemic would negatively impact the delinquency levels.

However, they do not expect this to trigger a major banking crisis.

"It's true that the fast pace of the delinquency rates' monthly increase is worrisome. Yet, I think the current situation is not like the previous financial crisis of the late 2000s," a banking analyst told The Korea Times on condition of anonymity.

"First, banks' common equity tier-1 capital ratio has increased by more than five percentage points. Secondly, the quality of secured loans has improved. For instance, back in 2008, households' loan-to-value (LTV) of mortgaged real estate fell to some 40 percent. But it's now risen to about 60 percent, meaning that a real estate price fall of up to some 50 percent does not pose a major threat to banks' financial soundness. Lastly, banks' loss reserve has also increased significantly, amounting to several trillions of won as of now," the banking expert explained.

Meanwhile, delinquency levels at non-bank financial companies, such as card companies and savings banks, are also rising, placing downward pressure on the vitality of the Korean economy.

annajpark@koreatimes.co.kr