"Banks Double Loan Loss Provisions in a Year to Expand Corporate Lending Capacity"

The amount of loan loss provisions accumulated by major commercial banks in the first half of this year has approximately doubled compared to a year ago. While part of this increase is due to a rise in non-performing loans, it is also the result of banks proactively strengthening their risk management in response to future uncertainties. Since corporate loans-especially those to small and medium-sized enterprises-are more vulnerable to credit risk management than household loans, building up loan loss provisions in advance can help reduce the burden associated with expanding lending.

According to the financial sector on August 14, the total loan loss provisions set aside by the four major commercial banks (KB Kookmin, Shinhan, Hana, and Woori Bank) in the first half of this year amounted to 1.5775 trillion won, an 80% increase from 880.3 billion won in the same period last year. Looking at this year alone, provisions rose from 748.3 billion won in the first quarter to 829.3 billion won in the second quarter, indicating that more provisions were accumulated in the second quarter.

원본보기 아이콘

Loan loss provisions refer to the amount banks set aside in advance for loans to businesses or households that are expected to default in the future. By bank, KB Kookmin Bank increased its provisions from 350.6 billion won in the first half of last year to 635.3 billion won this year; Shinhan Bank (based on credit loss provisions) from 150.7 billion won to 347.2 billion won; Hana Bank from 67 billion won to 222 billion won; and Woori Bank from 312 billion won to 373 billion won. Notably, both KB Kookmin Bank and Shinhan Bank accumulated more provisions in the second quarter than in the first quarter this year.

Banks have increased their loan loss provisions because they anticipate that economic uncertainty will persist into the second half of the year, potentially leading to an increase in risky assets. Unlike 2023, when more than 2 trillion won in provisions were set aside in the first half alone due to real estate project financing (PF) defaults, this year the focus has shifted to preemptive action. Shinhan Bank took a more conservative approach in its corporate credit assessments in the first half, resulting in additional provisions, while KB Kookmin Bank expanded its provisions by adding extra amounts on top of those calculated through individual assessments.

Banks have effectively created a buffer in advance for loan assets with a higher risk of default, and this conservative approach to risk management is intended to secure the capacity to increase corporate lending in the second half of the year. Banks are aiming to expand corporate loans by 1 trillion won per month in the second half, or to achieve annual growth of 6-7%. A banking industry official stated, "As the total volume of household loans is being reduced due to regulatory measures, banks are focusing on expanding corporate loans in the second half of the year. Since corporate loans require more rigorous risk management, banks are building up sufficient provisions in advance to alleviate the burden." As of the end of July, the outstanding balance of corporate loans (including large corporations, small and medium-sized enterprises, and individual business owners) at the five major banks, including NH Nonghyup Bank, stood at 1,155.3684 trillion won, an increase of 1.5415 trillion won in just one month.

With sufficient provisions already secured, some analysts suggest that the scale of provisions could stabilize or decrease in the second half of the year. However, the impact of U.S. tariffs is expected to become more pronounced in the second half, and the restructuring of the petrochemical industry, including companies like Yeocheon NCC, is emerging as an additional risk factor. A financial sector official commented, "It is crucial that there are no unexpected variables. Ultimately, the scale of loan loss provisions will depend on the business environment faced by companies."

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.