Car, Oil Refining, Aviation... Banks Conduct 'Microscopic Inspection' of Loans to COVID-19 Impacted Crisis Industries

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[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 disease (COVID-19). The plan is to focus on loans related not only to sensitive sectors like food, lodging, and retail but also to major industries recently plunged into crisis, aiming 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 review focusing on petroleum companies whose sales dependence on petroleum companies is over 30% or whose sales have sharply declined, including SK Innovation, after the four major petroleum companies recorded a historic first-quarter deficit of 4.3775 trillion won 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 from the bank said, "The petroleum industry has recorded its 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 will we maintain existing credit limits."

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 from the sharp decline in performance has not yet been significant. However, if the downturn in the petroleum industry caused by COVID-19 continues, companies with insufficient cash and weak management conditions, mainly small and medium-sized enterprises, are likely to be hit hard. Bank A plans to weed out companies with poor financial conditions by encouraging repayment of borrowings through asset sales.

A Bank B official also 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," and added, "Not only petroleum but also exposures to other key industries such as chemicals, automobiles, and steel will inevitably be reduced if the impact of COVID-19 prolongs."

Other commercial banks have also begun 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 won 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 on the recovery of automobile-related loans, so the amount has hardly decreased compared to 33.2281 trillion won at the end of 2017 and 32.3516 trillion won at the end of 2018. Banks commonly have high exposure to the automobile industry, and if the sluggish demand continues, they are considering lowering the credit ratings of related companies during internal credit evaluations.

An executive from 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," and lamented, "Although the government orders restraint on reducing automobile loans and deferral of principal and interest repayments for corporate loans, if the situation worsens, banks will have no choice but to shut off the tap 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 won. Among these, short-term borrowings that commercial banks must recover within one year total about 500 billion won as of the end of last year, including 90 billion won from NongHyup Bank, 105.3 billion won from Hana Bank, and 168 billion won from Kookmin Bank and others. Although it is uncertain when aircraft demand will recover, banks view loan maturity extensions as inevitable.

Banks are also strengthening loan inspections for sensitive industries. Hana Bank plans to conduct credit evaluations twice in June and December, with the June evaluation, which is usually simplified, to be significantly strengthened 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 a concern," 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."

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