Concerns Over Corporate Chain Bankruptcies Due to COVID-19... Banks on High Alert for Asset Soundness Management (Comprehensive)

If COVID-19 Prolongs, More Companies Will Become Distressed... Moody's Also Issues Warning

[Asia Economy reporters Kangwook Cho and Haeyoung Kwon] As the novel coronavirus disease (COVID-19) spreads, small and medium-sized enterprises (SMEs) and self-employed individuals have been hit hard, raising alarms over the asset quality management in the banking sector. Commercial banks have steadily increased loans to SMEs and the self-employed over recent years and have expanded financial support such as interest rate cuts and new funding for SMEs and small business owners in response to COVID-19. Consequently, concerns are growing that prolonged COVID-19 could lead to a surge in distressed companies, further deteriorating banks’ asset quality.

According to the financial sector on the 9th, the outstanding SME loans (including individual business owners) at the five major commercial banks?Shinhan, KB Kookmin, Woori, Hana, and NH Nonghyup?as of the end of February stood at KRW 450.1293 trillion, an increase of KRW 2.8818 trillion from the previous month’s KRW 447.2475 trillion. Excluding individual business owners, the SME loan balance rose from KRW 206.8686 trillion to KRW 208.1979 trillion during the same period, an increase of KRW 1.3293 trillion.

In recent years, banks have increased financial support for SMEs and venture companies in line with government policies promoting these sectors. In fact, the SME loan balance at the five major commercial banks grew from KRW 329.0653 trillion in 2015 to KRW 444.2247 trillion last year, an increase of KRW 115.1594 trillion over four years. This corresponds to an average annual increase of about KRW 28.8 trillion during this period.

However, recent growth figures suggest that the upward trend in SME loans in the banking sector will steepen further this year. The increase for January alone was KRW 3.0228 trillion, and from January to February, it was KRW 2.8818 trillion, totaling KRW 5.9046 trillion over two months. Based on this arithmetic, SME loans could increase by KRW 35.4276 trillion over the entire year. This figure exceeds last year’s increase by about KRW 5 trillion and surpasses the four-year average annual increase by KRW 6.6 trillion. Considering that IBK Industrial Bank’s SME loan balance (including foreign currency loans) in February was KRW 165.3123 trillion, up KRW 1.1863 trillion from the previous month’s KRW 164.126 trillion, the total SME loan balance in the banking sector is expected to grow even larger. Meanwhile, banks are further expanding special financial support for SMEs and small business owners by increasing the scale of new special loan funding from KRW 3.2 trillion to KRW 4.6 trillion amid the COVID-19 crisis.

The problem is that if COVID-19 prolongs, the risk of SME loan defaults will increase, potentially leading to liquidity shortages in the banking sector. Economic sentiment is freezing up. The Business Survey Index (BSI) for all industries in February dropped 10 points from the previous month to 65, marking the largest decline since statistics began in 2003. The non-manufacturing sector, including restaurants and wholesale/retail industries, saw its BSI fall 9 points to 64. The low-cost carriers (LCCs) and travel industries, hit directly by COVID-19, are expected to see a surge in distressed companies. The financial investment sector estimates the banking sector’s risk exposure to nine LCC airlines at KRW 220.7 billion, KRW 51.3 billion for the travel industry, and KRW 182.7 billion for the film industry, totaling about KRW 454.7 billion across these three sectors.

The situation is even more severe for regional banks. They are suffering a double blow from the collapse of key industries and the COVID-19 outbreak. Including the policy bank IBK Industrial Bank, DGB Financial and BNK Financial have a high proportion of SME loans, accounting for 60-70% of total loans, and the share of self-employed (SOHO) loans exceeds 20% of total loans, higher than other banks.

The economy in the Daegu and Gyeongbuk regions is rapidly freezing. SMEs have halted factory operations due to confirmed COVID-19 cases, and self-employed business activity has completely stagnated due to avoidance of outings amid infection fears. Daegu, where COVID-19 cases surged, has seen its local economy collapse. According to the Bank of Korea, the Consumer Sentiment Index (CIS), a current economic indicator, plunged from 70 in January to 57 in February in the Daegu-Gyeongbuk region. This is the largest drop since the MERS (Middle East Respiratory Syndrome) outbreak in May 2015, when the index fell from 81 in May to 66 in June.

The ongoing collapse of key industries remains a risk factor for regional banks. According to the Korea Deposit Insurance Corporation, as of the end of September 2019, the proportion of loans related to the top four industries with signs of distress identified by the Financial Supervisory Service?machinery equipment, real estate, auto parts, and metal processing?accounted for 26.9% of total loans at regional banks. This is about 10 percentage points higher than the 17% at commercial banks.

The 'Busan-Ulsan-Gyeongnam (Bu-Ul-Gyeong) Belt' and regions such as Jeonbuk and Gunsan, which heavily depend on key industries like automobiles and shipbuilding, have been hit hard, and the risks have been directly transferred to regional banks. According to the Financial Supervisory Service, the fixed non-performing loan ratio (loans overdue by more than three months) for corporate loans at Gyeongnam Bank, a key bank in the Bu-Ul-Gyeong Belt, rose from 1.27% in September 2018 to 1.59% in September 2019.

Given these circumstances, the international credit rating agency Moody’s has also raised warnings. In a recent report, Moody’s expressed concern that "the spread of COVID-19 could disrupt many domestic industries, potentially leading to increased asset quality risks for some banks exposed to these impacts."

This content was produced with the assistance of AI translation services.