5 Major Bank CEOs "Interest Rates to Rise 0.25%p Within the Year... Focus on Managing Non-Performing Loans" (Comprehensive)

What Are the Loan Management Strategies for the Second Half of the Year According to the Heads of the 5 Major Banks?
Base Interest Rate Expected to Rise Once This Year and 1-2 More Times Next Year

[Asia Economy Reporter Park Sun-mi] The heads of the five major domestic commercial banks identified managing the risk of non-performing loans due to the resurgence of COVID-19 as one of their top priorities for the second half of this year. Although the timing may be delayed due to the fourth wave caused by the spread of the Delta variant, if combined with an increase in the base interest rate, vulnerable groups may find it difficult to repay their debts, leading to a rapid increase in non-performing loans. In fact, as social distancing and business restrictions have been strengthened due to the fourth wave of COVID-19, the ability to repay loans has become increasingly fragile, raising the likelihood of non-performing loans snowballing. Especially, since new loans are expected to be tightly restricted, the threshold for loan applicants to access banks is anticipated to rise further.

The bank presidents also expressed their intention to take the lead with proactive digital strategies ahead of the full-scale competition for dominance with big tech companies (large information and communication enterprises) through services such as MyData and debt refinancing loan platforms. They showed a cautious approach toward partnerships with cryptocurrency exchanges, which remain a 'hot potato.'

COVID-19 and Interest Rate Hikes: "Defending Against Non-Performing Loans"

On the 14th, Asia Economy conducted a survey of the heads of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?regarding their outlook on the financial market and management strategies for the second half of the year. The bank presidents unanimously agreed that they must prepare in advance to manage risks arising from the resurgence of COVID-19.

Accordingly, their strategy is to operate loans by dividing them into two tracks: household and corporate sectors. For household loans, since the household debt management plan applying a borrower-based total debt service ratio (DSR) regulation of 40% has been in effect since this month, they plan to adjust more conservatively. The financial authorities aim to suppress the annual household debt growth rate to around 5-6%. On the other hand, there is a common stance to expand support for small and medium-sized enterprises facing difficulties in financing due to COVID-19.

Park Sung-ho, CEO of Hana Bank, said, "If interest rates rise amid the COVID-19 situation, the risk of non-performing loans will increase mainly among multiple debtors within household credit loans," adding, "We will monitor the principal and interest repayment ability of borrowers significantly affected by the interest rate hike and continuously manage the inflow of high-risk borrowers." Kwon Kwang-seok, CEO of Woori Bank, also stated, "We will strengthen risk management for loans with concerns about non-performing loans in preparation for the realization of potential non-performing loans related to COVID-19."

In fact, amid the prolonged COVID-19 situation, the delinquency rate on won-denominated loans at domestic banks rose by 0.01 percentage points from the end of the previous month to 0.32% as of the end of May. Delinquency rates increased in both corporate and household sectors. The bank presidents are concerned that if unemployment and self-employed business closures increase due to the resurgence of COVID-19, the soundness of loans will deteriorate.

Accordingly, they plan to operate loan strategies more conservatively, following the financial authorities' orders to tighten lending. Heo In, CEO of Kookmin Bank, said, "We will execute new loans considering the borrower's repayment ability." Kwon Jun-hak, CEO of Nonghyup Bank, also stated, "We will operate loans by strengthening screening and interest rate policies for household loans, which are showing rapid growth."

According to the 'Loan Behavior Survey' recently released by the Bank of Korea, the domestic banks' expected credit risk index for the third quarter (18) rose by 8 points compared to the second quarter (10), signaling that the loan threshold will increase. The bank presidents noted that although interest rates are currently very low, the risk to the household sector could increase sharply with interest rate hikes in the second half. However, if multiple interest rate hikes occur within a short period, they foresee a potential rise in household non-performing loans centered on low-credit borrowers, multiple debtors, and self-employed individuals from next year onward, urging preparations for this scenario.

Base Interest Rate to Rise 0.25%p in Second Half... Prolonged COVID-19 Remains a Variable

The bank presidents predicted at least one base interest rate hike in the second half of this year and an additional one or two hikes next year, while also pointing out that the prolonged COVID-19 pandemic could delay interest rate increases.

With the number of new domestic COVID-19 cases surpassing 1,600, breaking records, and resurgence trends appearing even in countries with high vaccination rates, the actions of global central banks, including the U.S. Federal Reserve, have become more fluid. Kwon, CEO of Woori Bank, said, "We expect the base interest rate to rise by 0.25 percentage points in the second half, but if the prolonged COVID-19 situation increases downside risks to economic growth, we must keep open the possibility of the base rate being held steady at 0.50%."

However, the bank presidents commonly emphasized that if the COVID-19 spread subsides, they expect at least one 0.25 percentage point rate hike in the second half. They foresee a high possibility that the base interest rate, currently at 0.5%, could rise to 1% through one or two hikes by next year. CEO Heo said, "Considering the economic recovery trend, interest rate hikes may be possible in the second half of next year, but considering the Bank of Korea's stance on the need to resolve financial imbalances, it is highly likely that one or two hikes will occur from the fourth quarter of this year to January next year."

The bank presidents cited asset bubbles, elevated inflation rates, and expansionary fiscal policies such as supplementary budgets as reasons for expecting at least one rate hike within the year. Kwon, CEO of Nonghyup Bank, explained, "The rapid increase in loans during the low-interest-rate period, intensifying asset bubbles, inflation exceeding 2% over the past three months, and rising bond yields amid economic recovery expectations are market indicators demanding a shift in monetary policy."

Meanwhile, the Bank of Korea will hold a Monetary Policy Committee meeting on the 15th to decide the base interest rate. Although the dominant view is that the rate will likely remain unchanged this month due to the fourth wave of COVID-19, with Governor Lee Ju-yeol having effectively confirmed a rate hike within the year, the banking sector is preparing management strategies with rate increases in mind.

◆ Fierce Competition for Survival with Big Tech: "All-Out Attack"

The heads of the five major banks announced aggressive responses to the full-scale competition with big tech companies.

With the launch of MyData and debt refinancing loan platform services scheduled for the second half of this year, fierce battles for survival between commercial banks and big tech companies are expected. CEO Heo emphasized, "The MyData business will bring significant changes to the banking business system. In the second half of this year, becoming a platform company chosen by customers in the competition to secure dominance in MyData is very important."

They anticipate that digital competition will intensify further due to the accelerated entry of big tech and fintech into the financial industry and the implementation of the MyData business. CEO Kwon of Woori Bank said, "One of the most important tasks for the financial sector in the second half and next year is strengthening digital capabilities. It is time to prepare products that significantly improve services, convenience, and accessibility from the customer's perspective, moving away from the traditional financial service provider standpoint."

The bank presidents also mentioned that establishing internet-only banks through business division could be an alternative for banks to create new businesses on an equal competitive footing with big tech companies.

Jin Ok-dong, CEO of Shinhan Bank, said, "For banks to pursue disruptive innovation and create new businesses that enhance competitiveness on an equal competitive footing with big tech, it is necessary to relax regulations related to internet-only banks so that banks can choose from various options."

Regarding partnerships with cryptocurrency exchanges, which have sparked a craze for 'debt investment' (borrowing to invest), the bank presidents expressed a cautious approach. Cryptocurrency exchanges must obtain Information Security Management System (ISMS) certification and real-name accounts by September 24 under the Act on Reporting and Using Specified Financial Transaction Information and report to the Financial Intelligence Unit (FIU).

Banks are reluctant because issuing real-name accounts means they must bear the responsibility for verifying the exchanges. CEO Park said, "It is difficult to consider cryptocurrency as incorporated into the regulated market, so we are not reviewing partnerships with exchanges." CEO Kwon of Woori Bank also expressed concerns, saying, "The risks of financial accidents such as money laundering are burdensome." Regarding the accelerated consolidation of offline branches since last year, the bank presidents emphasized that it is an unavoidable reality for efficient operation.

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