Non-performing loans at 5 major banks top W6tr for first time as corporate credit quality deteriorates

Non-performing loans at South Korea's five major commercial banks have surpassed 6 trillion won ($4.24 billion) for the first time, with corporate NPLs jumping more than 36 percent from the end of last year, raising fresh concerns about the health of the banking sector.

According to financial industry data released Wednesday, the combined NPL balance at KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank stood at 6.41 trillion won at the end of the second quarter this year, up 28.0 percent from 5.01 trillion won at the end of last year. It marks the first time the five banks' combined NPLs have exceeded 6 trillion won.

The NPL ratio — non-performing loans as a share of total loans — rose 0.07 percentage points to 0.34 percent from 0.27 percent at the end of last year, the highest level since February 2020 during the COVID-19 pandemic.

NPLs refer to loans on which principal or interest payments are more than three months overdue, or loans where the borrower has defaulted or seen a significant deterioration in repayment capacity, making it difficult for banks to recognize interest as income.

The increase was particularly sharp in corporate lending. Corporate NPLs jumped 36.4 percent to 4.65 trillion won at the end of June from 3.41 trillion won at the end of last year. The NPL ratio for corporate loans climbed 0.10 percentage points to 0.42 percent from 0.32 percent.

Household NPLs, by contrast, rose a more modest 10.2 percent over the same period, from 1.6 trillion won to 1.76 trillion won. The NPL ratio for household loans held steady at 0.09 percent for five consecutive quarters from the end of March last year through the end of June this year.

Banks attribute the deterioration primarily to prolonged high interest rates, a delayed economic recovery and sluggish domestic consumption, all of which have eroded borrowers' ability to repay. A slowdown in the real estate market, rising vacancy rates in commercial properties and rehabilitation proceedings at some companies have also been cited as factors driving the rise in corporate loan delinquencies.

In response, banks are stepping up monitoring of loans showing signs of distress while pursuing debt restructuring, maturity extensions and the write-off or sale of bad loans to shore up their balance sheets.

Other asset-quality indicators at the five banks are also worsening. Estimated-loss loans — the most severely classified category — reached 1.21 trillion won at the end of the second quarter, the highest since the second quarter of 2019, while loans classified as precautionary — a category flagging potential future losses — topped 10 trillion won, reaching 10.22 trillion won.