Automotive, Oil, and Aviation Hit by 'Corona Shock' One After Another... Banks "Have No Choice but to Prepare for the Worst" (Comprehensive)

Shock in Earnings of Four Major Refiners... Comprehensive Credit Review of SMEs with Over 30% Sales Dependence on SK Inno
Auto Loans Also Under Focused Risk Management... "If Car Partners' Sales Decline, Future Credit Reduction Inevitable"
As COVID Impact Grows, Some Banks Drastically Strengthen Simplified Credit Evaluation in June

[Asia Economy Reporter Kwon Haeyoung] Commercial banks have launched a 'microscopic investigation' into loans to companies in key industries such as automobile, petroleum, and aviation, which have been directly hit by the spread of the novel coronavirus infection (COVID-19). The plan is to focus on loans related to major industries recently plunged into crisis, as well as to sensitive sectors like food service, lodging, and retail, and to slow down the pace of lending. Internal credit evaluations have also been significantly strengthened to initiate proactive risk management.

According to the financial sector on the 14th, Bank A recently conducted a comprehensive loan investigation focusing on petroleum companies and their suppliers whose sales depend on petroleum companies by more than 30% or whose sales have sharply declined, including SK Innovation, after the four major petroleum companies recorded a historic maximum loss of 4.3775 trillion KRW in the first quarter of this year. Although petroleum companies have sufficient cash reserves and the possibility of an immediate liquidity crisis is low, small and medium-sized suppliers are relatively vulnerable in terms of their ability to respond to external variables and financial structure, necessitating meticulous loan management.

A senior official at the bank said, "The petroleum industry has recorded the worst performance since its establishment due to COVID-19, trade disputes, and oil price declines, and the business downturn is expected to continue, so we are checking the impact and financial conditions of small and medium-sized suppliers," adding, "For those experiencing temporary difficulties, we will expand emergency funding support, and for those with poor financial conditions from before, we plan to neither increase new loans nor maintain existing limits but reduce them."

It is reported that petroleum companies have advanced maintenance and repairs and are proceeding with facility investments as originally planned, so the shock to suppliers due to the sharp decline in performance is not yet significant. However, if the deterioration of the petroleum industry caused by COVID-19 continues, it is highly likely that small and medium-sized enterprises with insufficient cash and weak management conditions will be hit. Bank A plans to weed out companies with poor financial conditions from before by inducing loan repayments through asset sales.

Korea Credit Rating Agency downgraded the credit rating outlooks of petroleum companies including SK Innovation en masse the day before. After conducting a regular evaluation of corporate bonds of petroleum companies, Korea Credit Rating adjusted the rating outlooks of SK Innovation (AA+), SK Energy (AA+), S-Oil (AA+), and SK Incheon Petrochem (AA-) from stable to negative, indicating a high possibility of credit rating downgrades. The rating outlook of Hyundai Oilbank (AA-) was changed from positive to stable. Among petroleum companies, only GS Caltex (AA+) maintained its existing stable rating outlook.

A Bank B official said, "There is no immediate problem with loans to petroleum companies, but if sales continue to decline and credit ratings fall, there is no effective solution," adding, "Not only petroleum but also exposures to other key industries such as chemicals, automobiles, and steel will inevitably be reduced if the damage caused by COVID-19 prolongs."

Other commercial banks have also started comprehensive risk management for crisis-hit industries. In particular, the automobile industry, which has been directly hit by COVID-19, is a major inspection target. According to the Bank of Korea, loans related to the automobile industry by deposit banks amounted to 32.314 trillion KRW at the end of 2019. Although the business environment of the automobile industry has deteriorated due to export sluggishness and restructuring, the government has ordered restraint in recalling automobile-related loans, so the amount has hardly decreased compared to 33.2281 trillion KRW at the end of 2017 and 32.3516 trillion KRW at the end of 2018. Banks commonly have high exposure to the automobile industry, and if the sluggish demand for automobiles continues, they are also considering lowering the credit ratings of related companies during internal credit evaluations.

An executive at Bank C said, "As automobile demand plummets due to COVID-19, related suppliers such as steel, parts, and painting are at risk one after another," adding, "Although the government orders restraint in reducing automobile loans and deferral of principal and interest repayments for corporate loans, if the situation worsens, we will have no choice but to tighten the faucet from a risk management perspective."

The aviation industry is also a major management target. In the case of Korean Air, debts to be repaid this year, including asset-backed securities (ABS), borrowings, and corporate bonds, amount to 3.8 trillion KRW. Among these, short-term borrowings that commercial banks must repay within one year total about 500 billion KRW as of the end of last year, including 90 billion KRW from NongHyup Bank, 105.3 billion KRW from Hana Bank, and 168 billion KRW from Kookmin Bank and others. Although it is uncertain when aircraft demand will recover, banks view loan maturity extensions as inevitable. Additionally, some of the ABS issued by airlines, to which banks have extended credit worth several hundred billion KRW, are at risk of triggering 'early repayment triggers' requiring immediate repayment by the issuing airlines, which almost imposed credit risk on banks.

Banks are also strengthening loan inspections for sensitive industries. Hana Bank plans to conduct credit evaluations twice, in June and December, and intends to significantly strengthen the simplified June evaluation by reflecting external variables.

An executive in charge of risk management at Bank D said, "The impact of COVID-19 is so great and it is impossible to predict when the situation will end, and there is not a single industry from A to Z that is not worrying," adding, "Only banks that adjusted their loan portfolios during the last two financial crises survived, so it is time for proactive selection and concentration in preparation for the worst-case scenario."

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