Bad loans at four South Korean banks, including Industrial Bank of Korea, have risen more than 30% in two years, while the cushion of loan-loss provisions set aside to absorb them has narrowed. As provisioning failed to keep pace with souring corporate loans, one bank's coverage of bad loans slipped to around 100%. Loans classified as precautionary — potential future problem assets — are also growing, raising concerns that banks face additional cost burdens.
Combined substandard-and-below loans at IBK, Hana Bank, Woori Bank and Shinhan Bank stood at 8.808 trillion won ($6.1 billion) at the end of September, up about 900 billion won, or 11.4%, from a year earlier and 30.5% from the end of September 2024, according to financial industry sources on the 28th.
Even as bad loans grew, the relative buffer of provisions set against them shrank. The non-performing loan coverage ratio, which measures loan-loss provisions against bad loans, stood at 100.04% at IBK, 106.52% at Hana Bank, 126.70% at Woori Bank and 162.51% at Shinhan Bank at the end of September — all below year-earlier levels.
A ratio of 100% means a bank holds 100 won in provisions for every 100 won of bad loans. A reading below 100% means provisions are smaller than the balance of substandard-and-below loans. Because the ratio can fall even when provisions rise, if bad loans grow faster, both the change in provisions and the scale of bad loans need to be considered together.
Among the four, IBK has the thinnest cushion. Its bad loans rose 26.1 billion won, or 0.6%, from the end of September last year to 4.5082 trillion won, the largest of the four. Provisions, calculated from the bad-loan balance and the coverage ratio, fell about 5.1%. Its NPL coverage ratio dropped 5.98 percentage points from 106.02%, leaving provisions and bad loans at virtually the same level.
Woori Bank posted the steepest decline in coverage. Its NPL coverage ratio fell 54.21 percentage points to 126.70% at the end of September from 180.91% a year earlier, as bad loans rose 29.8% while provisions declined 9.1%. At Hana Bank, provisions increased 11.2%, but a 41.9% jump in bad loans pushed the coverage ratio down 29.43 percentage points. Although provisions moved in opposite directions at the two banks, both saw their capacity to absorb losses shrink relative to rising bad loans.
Deteriorating corporate loan quality is cited as the main driver. Hana Bank's substandard-and-below corporate loans swelled 65.2% to 1.4918 trillion won at the end of September from 903.1 billion won a year earlier. Household bad loans declined but not enough to offset the increase on the corporate side. At Woori Bank, substandard-and-below loans to large companies and small and midsize firms rose 29.1% to 970.7 billion won from 752 billion won. Corporate loans accounted for 71.6% of the increase in Woori Bank's total bad-loan balance.
The erosion of the buffer is more pronounced against the level two years ago. Woori Bank's NPL coverage ratio has fallen to less than half of the 270.24% recorded at the end of September 2024, while Hana Bank's has moved close to 100% from 181.67% at that time. At the same point, the ratios at IBK and Shinhan Bank were 116.86% and 190.37%.
Potential problem loans are also rising. Precautionary loans at the four banks totaled 12.6293 trillion won at the end of September, up 483.2 billion won, or 4.0%, from 12.1461 trillion won a year earlier. That leaves banks managing loans that could migrate into the bad-loan category while also working through assets already classified as impaired.
Delinquency rates rose from a year earlier to 1.04% at IBK, 0.51% at Hana Bank and 0.46% at Woori Bank. Shinhan Bank's improved to 0.29% from 0.31%. Still, Shinhan Bank's bad loans rose 2.8% while provisions increased just 1.6%, lowering its coverage ratio to 162.51% from 164.38%. Its substandard-and-below loan ratio also fell to 0.29% from 0.30%, though a 4.7% increase in total loans contributed to the decline.
When loan balances grow quickly, bad-loan ratios can fall even if the amount of bad loans does not shrink. That is why analysts caution against concluding that loss-absorbing capacity has recovered simply because ratio-based indicators have improved. In particular, if bad loans increase further or recovery prospects worsen, forcing banks to set aside more provisions, net profit would come under pressure.
"If we set aside additional provisions, costs rise accordingly and net profit falls," an official in the financial industry said.