Bad loans at South Korean banks swelled to nearly 19 trillion won, the largest amount in eight years, as newly soured debt piled up at small and medium-sized businesses amid a sluggish economy.
Non-performing loans at domestic banks stood at 18.9 trillion won ($13.6 billion) at the end of June, up 2.3 trillion won, or 13.9%, from 16.6 trillion won at the end of last year, according to the Financial Supervisory Service on the 2nd. That is the highest level since the end of June 2018, when the figure reached 19.4 trillion won. Bad loans as a share of total lending rose to 0.63% from 0.57% at the end of last year, an increase of 0.06 percentage point.
Corporate lending drove the increase. Bad loans on corporate credit reached 15.2 trillion won at the end of June, up 2 trillion won from 13.2 trillion won at the end of last year. Household bad loans rose 300 billion won over the same period, to 3.4 trillion won from 3.1 trillion won. Credit card bad loans held steady at 300 billion won.
Newly soured debt is also mounting quickly. Bad loans newly recognized during the second quarter totaled 7.2 trillion won, up 800 billion won from 6.4 trillion won a year earlier. That is 1.7 trillion won more than the 5.5 trillion won recorded in the first quarter.
The deterioration was most pronounced in loans to smaller companies. Of the 5.7 trillion won in corporate bad loans newly recognized in the second quarter, 4.5 trillion won, or about 79%, came from small and medium-sized enterprises. New bad loans at those companies rose 1.2 trillion won from 3.3 trillion won in the first quarter. New bad loans at large companies climbed 400 billion won over the same period, to 1.2 trillion won from 800 billion won.
Bad loan ratios worsened as well, again led by corporate lending. The bad loan ratio on corporate credit rose to 0.77% at the end of June from 0.74% at the end of March, an increase of 0.03 percentage point and the highest level since the end of March 2021. The ratio for large companies rose to 0.53% from 0.50% over the same period, while the ratio for small and medium-sized companies rose to 0.92% from 0.88%. The household bad loan ratio edged up to 0.33% from 0.32%.
Banks disposed of 6.1 trillion won in bad loans during the second quarter in response to the deterioration. That was 1.7 trillion won more than the 4.4 trillion won cleared in the first quarter but 400 billion won less than the 6.5 trillion won disposed of in the second quarter of last year. Because newly recognized bad loans exceeded disposals by 1.1 trillion won, the overall balance of bad loans increased.
Loan loss reserves edged higher, but bad loans grew faster. Reserves stood at 26.9 trillion won at the end of June, up 200 billion won from 26.7 trillion won at the end of last year. The coverage ratio, which measures reserves against bad loans, fell to 142.9% from 160.3% at the end of last year, a drop of 17.4 percentage points.
The Financial Supervisory Service said soundness remains sound when banks' profitability, capital ratios and other loss-absorbing capacity are taken into account, but added that preemptive management of asset quality is needed given the prolonged situation in the Middle East and the possibility of higher interest rates at home and abroad.
