"Authorities Pressure for Additional Provisioning, Not a Major Burden on Banks"

Even with a 10% Increase in Provisions, Dividend per Share Falls Only 0.7%
"End of Small Business Loan Maturity Extensions Won't Be a Major Burden"

On October 21 last year, a customer is consulting at a loan counter in a bank in Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Financial authorities are pressuring banks to increase their loan loss provisions in preparation for potential hidden risks. Although additional reserves will reduce profits and losses immediately, it is analyzed that recognizing future possible costs in advance will reduce future expenses and help profitability in the long term.

According to the financial industry on the 30th, the Financial Supervisory Service recently requested major banks to "increase the size of reserves" regarding their loan loss provision plans submitted for the fourth quarter of last year. Some banks are reported to have resubmitted their plans. This is interpreted as a judgment that market instability has increased due to the rapid spread of the COVID-19 Omicron variant and the adjustment phase of asset prices caused by rising interest rates.

In particular, the decision to basically end the loan maturity extension (115 trillion won) and principal and interest repayment deferral (12.1 trillion won) measures for small business owners by the end of March is also cited as a background for the order to expand provisions. The delinquency rate and non-performing loan ratio (classified as fixed, doubtful recovery, estimated loss) of banks decreased from 0.26% and 4.1555 trillion won at the end of 2019, when COVID-19 began to spread, to 0.17% and 3.1461 trillion won at the end of the third quarter of last year, respectively. However, financial authorities view this as an optical illusion caused by loan maturity extensions and believe that loans to self-employed individuals could become seeds of future defaults.

However, there are also views that such concerns are somewhat excessive. Although the maturity extension and repayment deferral for small business owners will end at the end of March, it is analyzed that the repayment deferral termination will not immediately lead to defaults because a soft landing plan will be implemented simultaneously. Eun-gap Kim, a researcher at IBK Investment & Securities, explained, "It is expected that a phased normalization will be premised, including the dispersion of repayment timing, normalization of interest deferral, and shortening of extension periods, and policy support can be implemented if necessary," adding, "Provisions for a decline in real estate prices will not be a big problem because the loan-to-value ratio (LTV) is low."

The reduction in dividends due to additional loan loss provisions is also expected to be small. Researcher Kim said, "Assuming the additional provision size is 10% of last year's annual provision forecast, the annual net profit will decrease by about 2.8%, and the dividend per share will decrease by about 0.7%, so the impact will not be significant," and predicted, "Although profits and losses will decrease immediately, recognizing future possible costs in advance is likely to help future profitability through reversals or reductions in future costs."

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