South Korea's four major financial holding companies reported corporate loan delinquency rates rising to a 10-year high in May. Domestic banks' won-denominated loan delinquency rate reached 0.67% at the end of May, the highest level since October 2016, according to Financial Supervisory Service data. The increase stems from prolonged economic recovery delays and elevated financial costs weakening repayment capacity among small and medium-sized enterprises (SMEs) and small business owners. Banks achieved record half-year net profits of 11.3392 trillion won in the first half but now face mounting asset quality management challenges as interest rate hikes and sluggish domestic demand pressure borrowers.
Banks Expand Corporate Lending Amid Household Loan Restrictions
The four major financial holdings (KB, Shinhan, Hana, Woori Financial) posted combined first-half net profit of 11.3392 trillion won, a record for any half-year period. Non-bank divisions including securities and asset management saw substantial profit growth driven by strong equity markets, while bank interest income also increased.
All four major banks reported higher first-half interest income. Won-denominated loans grew steadily despite ongoing household lending regulations. KB Kookmin Bank's end-of-first-half won loan balance stood at 385 trillion won, up 2.0% from the end of last year. Shinhan Bank reached 340 trillion won (up 1.7%), Hana Bank 327 trillion won (up 2.9%), and Woori Bank 311 trillion won (up 2.6%).
Large corporations drove first-half corporate loan growth. Five major banks' corporate loan balances increased 3.78% from 819.7951 trillion won at the end of last year to 850.8138 trillion won at the end of June. Large corporate loans surged 11.45% from 172.3317 trillion won to 192.0585 trillion won, while SME loans rose only 1.73% from 643.3247 trillion won to 654.4555 trillion won. Small business and individual proprietor loans (SOHO loans) increased just 0.30% from 322.1380 trillion won to 323.0992 trillion won, effectively stagnating.
Banks expanded corporate financing while prioritizing asset quality by concentrating lending on higher-credit large corporations and quality firms amid household loan regulatory tightening. Banks plan to continue corporate finance-centered growth strategies in the second half.
Seo Gi-won, KB Kookmin Bank Deputy President, stated during KB Financial's earnings conference call: "We will flexibly adjust funding proportions considering market rates and liquidity, and expect annual NIM to rise slightly from last year through core deposit expansion."
Kang Young-hong, Shinhan Bank CFO, said: "We expect second-half bank NIM to improve an additional 3-4bp as base rate hike effects are reflected. While the first half focused on external growth through productive finance, the second half will pursue NIM improvement through profitability-focused quality asset expansion."
SME Delinquency Rate Hits 11-Year High at 1.00%
Asset quality pressures are mounting alongside corporate finance expansion. According to the Financial Supervisory Service, domestic banks' won loan delinquency rate at the end of May reached 0.67%, up 0.06 percentage points from the previous month — the highest level since October 2016 (0.81%), spanning 9 years and 7 months.
Corporate loan delinquency rates approached 0.84%. SME loan delinquency rates hit 1.00%, the highest level in 11 years since May 2015. Delayed economic recovery and sustained high financial cost burdens weakened repayment capacity centered on financially vulnerable SMEs and small business owners.
Rising delinquency rates are reflected in financial holding company financial statements. The four major financial holdings' end-of-second-quarter non-performing loans (NPL) totaled 14.2344 trillion won, up 19.3% from the end of last year. NPLs are loans overdue for more than three months with low recovery probability, serving as a key asset quality indicator for financial institutions.
Delinquency rate increases have progressed beyond supervisory authority statistics to actual NPL growth at financial holdings. Banks are expected to intensify risk management around vulnerable sectors in the second half. They will strengthen monitoring of industries facing operational difficulties including construction, real estate, and petrochemicals, and emphasize asset quality management by reviewing sector-specific exposures.
As base rate hikes are fully reflected in second-half lending rates, banks' NIM may improve but borrower interest burdens could increase further. The Bank of Korea projected credit risks for both corporations and households will rise in the third quarter. Corporate sector credit risks are expected to expand centered on SMEs due to sales declines from delayed economic recovery and high financial cost burdens. Households are expected to face accumulated principal and interest repayment burdens centered on vulnerable borrowers including multiple debtors.
A financial industry official stated: "We must increase corporate lending according to the productive finance expansion trend, but cannot ignore asset quality indicators. In the second half, borrower selection and risk management capabilities are highly likely to determine performance rather than growth."
FAQ
What delinquency rate did Korean banks reach in May?
Domestic banks' won-denominated loan delinquency rate reached 0.67% at the end of May, the highest level since October 2016 according to Financial Supervisory Service data.
How much did large corporate loans increase in the first half?
Five major banks' large corporate loans increased 11.45% from 172.3317 trillion won at the end of last year to 192.0585 trillion won at the end of June, while SME loans rose only 1.73%.
What was the NPL total for four major financial holdings at the end of the second quarter?
The four major financial holdings' end-of-second-quarter non-performing loans totaled 14.2344 trillion won, up 19.3% from the end of last year.
