The corporate loan delinquency rate is expected to rise by nearly 0.1 percentage point in the second half of the year after the Bank of Korea (BOK) raised its base rate for the first time in three years and six months, a forecast showed. Domestic commercial banks have launched preemptive risk management to prepare for the possibility of household and corporate loan defaults.
According to the financial industry on the 19th, the simple average of small and medium-sized enterprise loan delinquency rates at KB Kookmin, Shinhan, Hana, Woori and NH NongHyup banks stood at 0.59% as of the end of June this year, up 0.11 percentage point from the end of last year (0.48%). The rate has continued to rise at some banks, moving from a range of 0.39% to 0.60% at the end of December last year to 0.37% to 0.75% at the end of June this year.
Commercial banks forecast that corporate loan delinquency rates will gradually rise in the aftermath of the latest base rate hike. Bank A estimated internally that the overall corporate loan delinquency rate would rise by 0.05 to 0.08 percentage point, led by small and medium-sized corporations, after a lag of one to two quarters. Bank B also ordered preemptive credit management, focusing on borrowers with variable rates and lump-sum maturity repayments and on industries sensitive to economic conditions and raw material prices.
Household loans are also facing growing pressure from rising delinquency rates. Analysts say the base rate hike will impose a direct burden mainly on vulnerable groups and some investors who use leverage. Bank A projected that the household loan delinquency rate would also rise by 0.025 to 0.3 percentage point after a lag of two to three quarters.
"While real economic indicators such as the growth rate and exports are improving, companies facing heavy production cost burdens from high interest rates, high prices and a high exchange rate will continue to struggle, and we expect polarization between industries to deepen," an official at a commercial bank said. "The delinquency rates of small and medium-sized corporations and individual business operators that already have high delinquency rates will continue to rise."
Forecasts for market rates in the second half of this year diverged. While some analyses hold that further increases will be limited because expectations of base rate hikes were largely reflected in market rates in the first half, others forecast that the upward trend will continue as the possibility of additional hikes remains. Because the Cost of Funds Index (COFIX) lags market rates, there is also a view that upward pressure on rates could emerge significantly, mainly on variable-rate loans.
Bank C observed that "the rise in the three-year government bond yield to the 3.8% range reflects expectations of a 1.0 percentage point base rate hike, so it will show stability in the second half and gradually decline from next year." In contrast, Bank D predicted that "the upward trend in market rates will continue on expectations of additional hikes, so the increase in rates could be larger in the second half than in the first half."
