Korean banks' earnings hit hard by unpaid debts, rate hikes

South Korea’s major banks expect their earnings in the second half to fall on the soaring distressed debts of households and companies due to increased interest rates. High rates will also impact financial institutions’ profitability as they have to pay more interest on customers’ savings and deposits, sources say.

The country’s four major banks, Kookmin, Shinhan, Hana and Woori, saw their bad debt expenses, or the amount of account receivables that can’t be collected, rise to 1.7 trillion won ($1.3 billion) as of end-June. These surged 41% from a year ago.

DISTRESSED ASSETS

Increased bad debt expenses mean that more clients are not able to repay their loans. Kookmin, Korea’s top lender, logged 674.8 billion won in such expenses, followed by Woori’s 425.1 billion won, Hana’s 385.3 billion won and Shinhan’s 212.6 billion won.

The banks’ bad debt expenses, considered their operating costs, are forecast to hit their net profit hard in the second half.  

The four major banks’ non-performing loans, which incur when the borrower is more than 90 days past due, rose 23% on-year to reach 3.17 trillion won as of end-June.

The banks’ distressed debts in Phase 3, which are under receivership or more than 90 days past due, increased 21.7% on-year to 6.75 trillion won as of the end of the first half. Of the assets in Phase 3, household debts rose 24.7% on-year to 2.39 trillion won during the same period.

“The banking sector's loan portfolio quality is likely to deteriorate in the second half as some loans taken out during the pandemic will mature and extensions of principal repayment will end,” said a banking source.

RISING INTEREST ON DEPOSITS, SAVINGS

The major banks’ earnings will also be hurt by increased interest on customers’ deposits and savings due to elevated policy interest rates. The four banks paid 22.34 trillion won in interest as of end-June, up 185.3% on-year.  

The average interest rate of the funds raised by the banks was between 2.34-2.5% in the first half, nearly 1.9 times the range a year ago, which means the institutions have to pay nearly double the interest they paid last year.

In contrast, their interest income amounted to 39 trillion won in the first half, up 68.3% on-year.

The increase in the banks’ interest payouts will lead to a rise in lending rates, adding to the burden on households and businesses that have already borrowed capital at high rates for investments and real estate purchases, a banking source said.

Write to So-Hyun Lee at y2eonlee@hankyung.com


Jihyun Kim edited this article.