South Korean banks' bad loans plunge to 10-year low in Q2

Loan delinquency ratio fell to 1.06% in June.

The bad debt ratio of South Korean banks maintained its steady decline after plummeting to a ten-year low in Q2 after standing at 1.06% as of end-June, according to the country's financial watchdog Financial Supervisory Service (FSS).

The loan delinquency ratio fell down 0.12 percentage points from three months earlier to represent the lowest point since Q3 2008 or the quarter right before the global financial crisis erupted.

“The operating environment for Korean banks in the next 12-18 months will be supported by healthy economic growth and Korea's real GDP is expected to grow faster than that of all other advanced G-20 countries in 2018, driven by strong external demand and domestic policies,” rating agency Moody's said in an earlier statement. 

The country’s domestic banks have been stepping up lending to households to decrease the share of riskier corporates in the lending mix as bad loans in Korea have generally been concentrated in the business sector particularly in the construction, steel, shipping and other transportation industries.

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The bad debt ratio for bank corporate loans fell by 0.19 percentage points from three months earlier to 1.56% as of end-June whilst the bad debt ratio for household loans inched down 0.01 percentage points to 0.24%.

Declining NPL figures can be also be partially attributed to efforts by state-run Korea Asset Management Corporation (KAMCO) which is tasked with cleaning up operations and providing support for corporate restructuring through loans, debt-equity swaps and payment guarantees.

“The development of KAMCO was critical to Korea’s success in resolving NPLs as KAMCO played a market‑making role by minimising information asymmetries and the lack of creditor coordination,” Deloitte said in an earlier report.