'Variant Spread and Declining Earnings in Vulnerable Industries'... What Risks Do Bank Corporate Loan Officers Identify?

The Bank of Korea Conducts Survey of Credit Officers... "Many Respondents Say Large Corporations' Credit Risk Outlook for Q4 Has Increased"
Concerns Over COVID-19 Resurgence and Supply Chain Disruptions
Automotive and Aviation Among Vulnerable Industries with Declining Profitability

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Corporate loan officers at domestic commercial banks viewed the automobile and aviation sectors as vulnerable industries and predicted a decline in the profitability and debt repayment capacity of large corporations. They judged that if financial conditions worsen due to various external risks such as the resurgence of COVID-19 and global supply chain issues, even large corporations could see a deterioration in their repayment ability.

According to a recent survey conducted by the Bank of Korea targeting corporate loan officers from 17 commercial banks including Kookmin Bank, Woori Bank, and NongHyup Bank, respondents identified factors such as the spread of COVID-19 variants, disruptions in global supply chains, weakening profitability and debt repayment capacity centered on vulnerable industries like automobile and aviation, and damage to economically sensitive sectors as credit risk factors for companies.

A Bank of Korea official explained on the 22nd, "Credit risk refers to the possibility of corporate loans becoming non-performing," adding, "Corporate loan officers in the financial sector viewed credit risk as increasing based on various economic uncertainties."

In this context, the credit risk outlook for large corporations as seen by commercial banks has recently risen slightly. According to the Bank of Korea’s statistical system ECOS, the related outlook for domestic banks in the fourth quarter of this year recorded a score of 3, showing a higher level than the third quarter (0). Until the previous quarter, opinions among loan officers were evenly split between those who said 'credit risk has increased' and those who disagreed, but this quarter, the number of those saying 'it has increased' grew.

The continuous increase in large corporate loan balances is also cited as a factor that could reduce repayment capacity. In the first quarter of this year, the loan balance for large corporations reached 205.7 trillion won, an increase of 10.5 trillion won compared to a year earlier. If various external risks and the trend of rising benchmark interest rates interact, the likelihood of a decline in corporate debt repayment capacity increases.

The Korea Economic Research Institute previously analyzed in its report "The Impact of Benchmark Interest Rate and Inflation Rise on Corporate Interest Burden and Profitability and Its Implications" that if corporate loan interest rates rise by 0.95% due to this year’s benchmark interest rate hike (0.5 percentage points) and inflation increase (1.3 percentage points), corporate interest expenses would increase by 13.5 trillion won.

Professor Lee In-ho of Seoul National University’s Department of Economics emphasized, "An increase in credit risk ultimately means a situation where debts may not be repaid," adding, "Damage from COVID-19 and global supply chains does not exempt large corporations." He further noted, "Sectors heavily reliant on face-to-face transactions, including aviation, must have been impacted."

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