"Oil Prices and Shipping Costs Remain Unstable Even After Middle East War"... Financial Sector on High Alert

Several Months Needed to Restore Oil Supply Chains

Sharp Rise in Shipping Costs Sparks 'Cost Shock' Fears Across Industries

Rising Corporate Insolvencies and Provisioning Burdens... Upward Pressure on Delinquency Rates Expected in Second Hal

As expectations for the reopening of the Strait of Hormuz have faded due to the breakdown of peace negotiations between the United States and Iran, South Korea’s financial sector is maintaining its emergency response system. Banks believe that, even if the war in the Middle East comes to an end, the already triggered surge in oil prices and shipping costs will be difficult to resolve in the short term. As a result, the financial sector is raising its level of response in preparation for a potential increase in corporate insolvencies and the burden of loan loss provisions due to the cost shock caused by the war.

Prolonged High Oil Prices and Shipping Rates... ‘Cost Shock’ Spreading Across Industries

Yonhap News Agency

According to the financial sector on April 13, banks are operating their response systems based on a scenario in which high oil prices and shipping rates continue for an extended period, anticipating that risk will remain even after the Middle East war ends.

An executive at one of the major commercial banks stated, “Even if peace is achieved, it will take a considerable amount of time to restore damaged energy infrastructure and normalize supply chains. There is a high possibility that international oil prices, shipping rates, and exchange rates will all remain unstable.” The executive added, “We are strengthening monitoring by checking the soundness of loans to vulnerable sectors on a daily basis.”

Banks are identifying high-risk sectors, analyzing their exposures, and strengthening corporate credit assessments. Stress tests that reflect the impact of rising oil prices and interest rates have also been further advanced.

In reality, costs such as oil prices and shipping rates are unlikely to stabilize easily. Recently, the U.S. Energy Information Administration (EIA) raised its 2026 outlook for Brent crude, the global oil price benchmark, from $78.84 per barrel to $96 per barrel. Even if passage through the Strait of Hormuz returns to normal, analysts say it will take several months for supply chains to recover and production to normalize.

Shipping rates are also rising sharply. The Shanghai Containerized Freight Index (SCFI) jumped about 42%, from 1,333.11 on February 27, before the war, to 1,890.77 on April 10. This is due to a combination of factors, including reductions in Middle East routes, rerouting, and increases in insurance premiums driven by war risk.

Another bank executive expressed concern, saying, “While oil price-sensitive sectors such as petrochemicals, which rely heavily on Middle Eastern raw materials, will be hit first, the simultaneous rise in raw material and shipping costs is increasing import price pressures. The burden of costs will spread not just to petrochemicals and airlines, but across all industries.”

It has also been reported that the domestic used car industry, which has a high proportion of exports to the Middle East, is suffering significant damage due to shrinking demand.

Real Economy Shock Raises Fears of Financial Fallout... Emergency Soundness Management by Banks

The banking sector is on alert for a potential deterioration in corporate repayment capacity and increases in loan delinquencies and insolvencies, as Middle East risk is compounded by delayed economic recovery. Of particular concern is that U.S. Treasury yields are rising due to inflation fears, increasing both banks’ funding costs and companies’ interest burdens. The benchmark five-year bank bond (unsecured, AAA) yield has declined somewhat since the ceasefire, but at its current level of about 3.8%, it remains higher than before the Middle East crisis (in the 3.5% range).

The petrochemical industry is the sector most directly hit by the Middle East crisis. The blockade of the Strait of Hormuz has disrupted the supply of Middle Eastern raw materials, leading to a prolonged decrease in operating rates, and it is expected that losses this year will inevitably widen. According to Korea Ratings, the debt ratios of the five naphtha cracking center (NCC) companies could rise by 30%, with net borrowings increasing to approximately 15 trillion won.

The banking sector’s exposure to Middle East risk is also significant. For the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori Bank), loans to oil price-sensitive industries such as petrochemicals, shipping, and airlines amount to about 30 trillion won. According to the Bank of Korea, loans to related industries by deposit banks totaled 99.32 trillion won as of the fourth quarter of last year, and including indirect effects, the total exposure is expected to be even higher.

The fact that the volume of non-performing loans is already increasing indicates that the resilience of the banking sector is weakening. The four major commercial banks’ non-performing loan balance stood at 3.8468 trillion won at the end of last year, up 21% from the previous year. Of this, corporate loans accounted for 2.6123 trillion won, more than double the amount of household loans, signaling that the pressure of insolvency is mounting especially in the corporate sector. The delinquency rate for corporate loans across the entire banking sector also rose from 0.5% to 0.59% during the same period.

Financial authorities are also stepping in. The Financial Supervisory Service is conducting regular stress tests on banks, using oil prices as a key variable, and plans to require additional capital expansion if necessary.

A commercial bank official said, “If the current trend of high interest rates continues this year, net interest margins (NIM) may expand in the short term, but in the long term, asset quality will inevitably deteriorate due to an increase in insolvent marginal firms and losses on bond valuations. The combined challenges of worsening financial conditions for small- and medium-sized businesses, heavier funding burdens, and rising import prices will further increase pressure on delinquency rates in the second half of the year.” The official added, “It will be difficult to guarantee record net profit this year, so banks have now entered a phase where managing soundness takes precedence over profitability.”

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