Loans extended by Industrial Bank of Korea (024110) to so-called zombie firms that cannot cover even their interest costs have risen by about 15 trillion won ($10.5 billion) in four years. The delinquency rate on its corporate loans has climbed to the highest level in 18 years amid slowing growth and high interest rates. Its capital buffer for weathering a crisis, meanwhile, is the lowest among Korean banks, prompting calls for the lender to strengthen its ability to absorb shocks.
Outstanding loans to marginal firms stood at 37.6 trillion won ($26.3 billion) at the end of August, according to the office of Rep. Park Jun-tae of the People Power Party, a member of the National Assembly's National Policy Committee. That is 62.8%, or 14.5 trillion won, higher than the 23.1 trillion won recorded at the end of 2022.
Marginal firms are companies whose interest coverage ratio has stayed below 1 for three consecutive years, meaning they have been unable to cover interest costs with operating profit for three straight years.
Total outstanding corporate loans rose 22.6% over the same period, to 279.8 trillion won from 228.3 trillion won. Lending to zombie firms grew faster than the overall loan book.
The number of marginal firms borrowing from the bank also increased, rising 16.7% to 19,218 at the end of August from 16,469 at the end of 2022. Most were small companies. Firms with annual revenue of 10 billion won or less accounted for 71.3%, or 26.8 trillion won, of the loans to marginal firms.
Delinquencies are deteriorating quickly as well. The delinquency rate on the bank's corporate loans was 1.21% at the end of August, the highest since the data were first compiled in June 2008. The rate was 0.32% at the end of 2022, rose to 0.94% at the end of last year, passed 1% at the end of March this year and has now topped 1.2%.
The deterioration reflects worsening business conditions for small firms and the self-employed as the economy splits into winners and losers. Rising interest rates this year, combined with supply chain disruptions from conflict in the Middle East, have left a growing number of small firms unable to cover their financing costs. With market rates likely to keep rising for some time, pressure on corporate loan quality is expected to build further.
That is directly affecting the financial soundness of IBK, which is required to channel more than 70% of its funds to small and medium-sized enterprises. Its asset quality indicators are already weakening meaningfully. Its common equity Tier 1 ratio stood at 11.6% at the end of June, the lowest among Korean banks, according to the Financial Supervisory Service. Its capital adequacy ratio under Bank for International Settlements rules was 14.9%, not the lowest, but the CET1 ratio is the more relevant gauge because the bank's equity includes hybrid securities and subordinated bonds that carry repayment obligations.
The National Assembly Budget Office warned in a recent report that the quality of the bank's loan assets is deteriorating faster than projected, while its capacity to absorb losses is shrinking. Its loan loss reserve ratio against non-performing loans fell to 105.2% at the end of March this year from 133.4% in March 2022. Loan loss reserves stood at 4.5 trillion won at the end of March, up 52.4% from four years earlier, but non-performing loans surged 93.3% over the same period. "Among all commercial and state-run banks, IBK has the lowest capital capacity to absorb losses in the event of a crisis," the office said. "Its capital buffer against a sharp deterioration in asset quality is structurally weak."
Politicians and industry officials are calling for the bank to improve its management of troubled loans. "If bad loans are not managed in time while both lending to marginal firms and delinquencies are rising, it could weaken the bank's capacity to support small and medium-sized enterprises," Park said. "IBK needs to closely assess borrowers' chances of recovery so that it can carry out policy financing on a stable footing."
