Provincial banks suffer rising bad loans

By Lee Kyung-min

Six major regional banks are reeling from rising bad loans as customer default rates have continued on an upward spiral amid the economic downturn.

This has been further exacerbated by large manufacturers in provincial areas undergoing radical restructuring.

According to data from the Financial Supervisory Service (FSS), the outstanding balance of loans in arrears at the six banks soared to a combined 165 billion won ($145 million) in 2018, more than double the 74.5 billion won in 2015. As a result, their average default rate rose to 0.34 percent from 0.21 percent over the same period.

The six lenders are Busan, BNK Kyongnam, Daegu, Kwangju, Jeonbuk and Jeju Bank.

This is in stark contrast to the four major national banks ― Shihan, Kookmin, Woori and KEB Hana ― based in Seoul. They mostly saw the rate under control, with their average default rate decreasing to 0.25 percent in 2018 from 0.3 percent in 2015.

“The increase in both the amount of loans and the default rate is something that requires constant monitoring given the sluggish economy,” said Sung Tae-yoon, an economist at Yonsei University.

“The problem may take a faster, greater toll because the already slow current real economy can be compounded by declining real estate prices, which can be a factor triggering a major risk to the economy given most of the borrowers have provided real estate as collateral.”

Hit particularly hard were banks in Busan and South Gyeongsang Province, where large shipbuilding and car manufacturing plants are based in Ulsan, Changwon and Goeje.

The continued losses have been caused not only by people who invested in the property market in provincial areas but residents who took out house-backed loans and are struggling to make monthly interest payments.

The delinquent outstanding loans for Busan Bank totaled 50.4 billion won last year, nearly 3 times that of the 17 billion won in 2015.

Over the same period, BNK Kyongnam Bank saw the its increase nearly fourfold, from 12.3 billion won to 41.7 billion won.

Jeonbuk Bank in Jeolla Province whose business portfolio includes Seoul and the surrounding Gyeonggi Province managed to keep the 2018 rate lower than the previous year.

Daegu has seen the loan default amount increase to 26.1 billion won in 2018, up 40 percent from 18.7 billion won in 2017.

For Kwangju, the amount jumped to 23.8 billion won in 2018, a 60 percent increase from 14.7 billion won the previous year.

The financial authorities said the default rate is within manageable range given the banks have enough loan/loss reserves, among many indicators of financial soundness.

The reserves are the amount banks have to set aside against a possible customer default.

“The recent increase in numbers is in no way a positive sign for the banks' performances, but there is not much they can do given the incidences were triggered due to no fault of their own,” a Financial Services Commission official said.

“These are areas that banks don't have much discretion over. They need to wait and see until industry revives. Also, the figures for regional banks seem relatively riskier compared to Seoul-based major banks with healthier numbers,” she added.

Meanwhile, the situation is similar with regional savings banks. Of the 32 such entities, nearly two-thirds, or 21 have suffered an increase in their default rates.