[1mm Finance Talk] Alarming Signs Behind Record Profits... Banks' NPLs Surge by 11%

The asset quality indicators of South Korea's four major banks deteriorated across the board in the first quarter of this year. Non-performing loans (NPLs) increased by 11% in just three months, and the delinquency rate also surged, raising concerns about further potential defaults. Analysts point out that the combination of the banks' competition to expand productive finance, growing economic polarization, and the prolonged war in Iran has led to a particular increase in defaults among small and medium-sized enterprises (SMEs).

According to the financial sector on April 29, the combined NPLs of the four major commercial banks (KB Kookmin, Shinhan, Hana, Woori) amounted to 5.0766 trillion won as of the end of March this year. This represents a sharp increase of 11.6% (527.7 billion won) compared to the end of last year. Consequently, the NPL ratio-the share of non-performing loans in the total volume of won-denominated loans-also rose from 0.31% to 0.34%.

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Banks classify and manage loans as non-performing if the borrower fails to repay principal or interest for more than three months. NPLs had increased to 4.9 trillion won by the end of June last year, but the upward trend slowed, dropping to 4.8763 trillion won at the end of September and 4.5489 trillion won by year-end. However, this year, NPLs have increased again, and the quarterly rise is the steepest since March 2023 (22%).

The increase in NPLs was largely driven by a rise in defaults on corporate loans. As of the first quarter, the volume of non-performing corporate loans reached 3.7518 trillion won, up 15.12% (492.7 billion won) from the end of last year. Household loan NPLs also increased (to 1.318 trillion won), but the rate of increase was limited to 2.79% during the same period.

Ultimately, although macroeconomic indicators such as growth rate and current account balance-driven by the semiconductor sector-are improving, the real economy, especially SMEs, continues to struggle. It is possible that as banks competed to expand productive finance, they may have relatively neglected the management of asset quality indicators. Another factor cited is that, following the real estate project financing (PF) default crisis, the market for selling and managing NPLs froze, leading banks to be less proactive in clearing out bad loans.

The concern is that NPLs may continue to rise going forward. The average delinquency rate of the four major banks-calculated based on loans overdue by more than one month-rose from 0.31% at the end of last year to 0.36% at the end of March this year.

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Among these, the corporate loan delinquency rate increased from 0.34% to 0.42%, outpacing the rise in the overall delinquency rate. Breaking it down by company size, large corporations maintained a stable rate of 0.12%, but the SME delinquency rate rose from 0.45% to 0.54%, an increase of 0.09 percentage points in just three months. Notably, Hana Bank (0.64%) and Woori Bank (0.61%) both saw their SME delinquency rates exceed 0.6%, the highest level since 2019. Meanwhile, the household loan delinquency rate at all four banks also turned upward after three to four quarters of stability, making the overall situation worrisome.

Given that loans overdue for more than three months are classified as non-performing, there is a possibility that NPLs will continue to increase. Although the four major banks achieved a record net profit of 3.8843 trillion won in the first quarter, they now face a structural crisis of deteriorating asset quality behind these results.

Banks are proactively building up loan-loss provisions in an effort to manage defaults, but the pace of new defaults is outstripping these efforts. Banks that set aside relatively smaller provisions in the first quarter may need to increase them in the second quarter and beyond. In fact, Hana Bank, which ranked second in net income in the first quarter, hinted in its recent conference call that loan-loss expenses could rise further in the second quarter.

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An official in the banking sector stated, "We are closely monitoring the situation, as there is a possibility that the repayment capacity of SMEs and small business owners could decline further amid the need for proactive productive finance and increasing geopolitical risks in the Middle East. The dilemma between preemptive asset quality management and expanding productive finance is deepening."

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