Bad loans at 5 major banks hit 7-year high of W1.21tr

Loans that South Korea's major banks have deemed nearly unrecoverable have swelled to their highest level in seven years, as persistently high interest rates and sluggish domestic demand continue to weigh on borrowers. Loans classified as potential bad debt have also crossed 10 trillion won, deepening concerns about the banking sector's financial health.

The combined "estimated loss" loans — the lowest tier in banks' loan-quality classification system — at KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank totaled 1.21 trillion won ($874 million) at the end of the second quarter, according to financial industry data released Wednesday. That is the largest figure since the 1.25 trillion won recorded at the end of the second quarter of 2019.

The total rose 26.6 percent from 956.7 billion won a year earlier and 18.1 percent from 1.02 trillion won at the end of the first quarter.

The "estimated loss" category represents the worst classification in a bank's loan-quality assessment. It covers loans where the borrower's repayment capacity has deteriorated severely, or where default, bankruptcy or business closure makes it effectively impossible to recover the outstanding debt beyond any collateral.

By bank, Woori Bank saw the sharpest increase, with its estimated loss loans surging 80.9 percent to 171.6 billion won in the second quarter from 94.9 billion won a year earlier. Hana Bank posted 182.8 billion won, up 55.1 percent, while Shinhan Bank recorded 342.1 billion won, a 48.0 percent increase. KB Kookmin Bank rose 4.7 percent to 248.9 billion won, and NH NongHyup Bank edged down 3.5 percent to 265.5 billion won.

The deterioration was most pronounced in corporate lending. The five banks' combined estimated loss loans in the corporate segment reached 980.9 billion won, up 26.3 percent from the same period last year and approaching 1 trillion won. Estimated loss loans in household lending also climbed 28.1 percent to 229.8 billion won.

Analysts attributed the trend to an uneven economic recovery concentrated in select industries, which has eroded the repayment capacity of small business owners and financially vulnerable borrowers while rising interest rates add further strain.

"Economic polarization has worsened and real economic activity has become concentrated in certain sectors, leaving small business owners and other vulnerable borrowers in increasingly difficult situations," an official at a commercial bank said. "With the added burden of rising interest rates, it is true that losses have been growing recently."

However, the official said the situation should not be seen as unusually severe. "It is hard to say the level of bad debt is exceptionally serious compared with last year or typical management benchmarks," the official said. "Given current economic conditions, some degree of loan deterioration and loss recognition is unavoidable."

Loans that could eventually turn into non-performing assets also increased. The five banks' combined "precautionary" loans — one step above estimated loss in the classification system — totaled 10.22 trillion won at the end of the second quarter, up 5.7 percent from a year earlier and 9.7 percent from the previous quarter.

Precautionary loans cover cases where a borrower's creditworthiness or repayment ability has weakened, raising the likelihood of losses. If delinquency persists or the borrower's financial position deteriorates further, such loans can be reclassified as substandard or below.