"Self-Employed Loans on Edge of Collapse... Overshadowed by PF" [Why&Next]

NICE Credit Rating Report
'Another Risk Hidden Behind Real Estate PF,
Household and Individual Business Loans'

Amid the turmoil in the financial market caused by real estate project financing (PF) issues, attention is also being drawn to household and individual business owner debt problems, which are as significant as PF.

On the 14th, NICE Credit Rating Agency stated this in its report titled "Another Risk Hidden Behind Real Estate PF: Household and Individual Business Owner Loans." The repayment burden on marginal borrowers amid high interest rates was identified as a risk factor for financial institutions such as banks, savings banks, and card companies.

Prolonged High Interest Rates and Delayed Economic Recovery... Risks to Banks and Savings Banks' Soundness

NICE Credit Rating Agency evaluated household loans in the banking sector as manageable but analyzed that individual business owner loans could pose a burden on banks' financial soundness. For the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?both household credit delinquent balances and delinquency rates have decreased. Regional banks, on the other hand, have shown an increase in delinquent balances and rising delinquency rates, but since their loan portfolios are mainly composed of corporate loans, soundness is expected to be manageable at the current level.

In contrast, the risk associated with individual business owner loans has significantly expanded. During the COVID-19 pandemic, policy-based financial support was provided to individual business owners, with banks playing a key role in liquidity supply. As the base interest rate sharply increased in 2022, the debt repayment burden on marginal borrowers grew, causing the number of delinquent borrowers last year to surge about fourfold compared to 2021. Although the delinquency rate in the individual business owner sector of major banks last year (0.43%) was slightly higher than that of personal credit loans (0.37%), the delinquent balance was around 1.6 trillion KRW, exceeding the 1.1 trillion KRW of personal credit loans.

NICE Credit Rating Agency stated, "The fatigue accumulated over years as banks have played a key role in providing livelihood financial support to low-income groups and vulnerable small and medium enterprises is reflected in current soundness indicators such as delinquency rates and non-performing loan ratios." They added, "If profitability deteriorates due to declining net interest margins and rising loan loss provisions, the capacity of banks, which have served as a pillar of the financial sector, may gradually weaken."

In the savings bank industry, delinquency rates for both household loans and individual business owner loans are soaring. As of the end of 2023, the non-performing loan ratio for the household sector was 5.4%, and the substandard loan ratio approached 10%, indicating a significant deterioration in soundness indicators. Most personal credit loan borrowers at savings banks are subprime borrowers with credit ratings below grade 5, who have continuously accumulated delinquencies amid rising credit risk, leading to rapid deterioration. Delinquency rates for individual business owner loans, mainly executed as subordinate mortgage loans on apartments, have also sharply increased. The delinquency rate for individual business owner mortgage loans was very low at around 0.6% at the end of 2021 but rose to 2.5% at the end of 2022 and reached 10% by the end of 2023.

Jihyung Sam, Senior Researcher at NICE Credit Rating Agency's Financial Evaluation Division 1, said, "With the continuation of a high-interest-rate environment and no clear signs of economic recovery, borrowers' principal and interest repayment burdens have increased, leading to higher delinquency rates." He explained, "While the visible problem in the market is real estate PF, household loans and individual business owner loans in the banking and savings bank sectors, totaling around 2600 to 2700 trillion KRW, are also concerning factors." He added, "Because the quantitative burden on household loans is large, deleveraging is necessary."

Increasing Household Debt Burden... Red Flags for Card Companies' Growth, Profitability, and Soundness

[Image source=Yonhap News]

As the principal and interest repayment burden on households increases, there are concerns that the growth, profitability, and soundness of card companies, which primarily serve ordinary citizens, may deteriorate. At the end of last year, domestic household debt (household loans + sales credit) reached a record high of 1886 trillion KRW. The growth of household debt is expected to slow compared to the past due to the real estate market slump and sustained high market interest rates. However, with the timing of interest rate cuts and price stabilization delayed more than expected, households' repayment burdens are expected to remain high for a considerable period.

The reduced private consumption due to the increased household debt burden is expected to limit card companies' growth. Domestic private consumption sharply declined in 2020 due to the impact of COVID-19 but showed a recovery trend from the second half of 2021, with some improvement in growth rates in the first quarter of this year. Nevertheless, the overall slowdown in private consumption has continued, leading to a decline in the growth rate of domestic credit card usage. With merchant commission rates falling, card usage amounts need to increase to maintain profits, but if households' principal and interest repayment burdens remain high, this could limit card companies' profitability and growth potential.

Additionally, card companies' interest expenses have sharply increased recently, worsening profitability. Since the second half of 2022, card companies' interest expenses have surged due to the steep rise in market interest rates. Last year, the combined interest expenses of seven specialized credit card companies amounted to 3.8 trillion KRW, an increase of 1.9 trillion KRW from the previous year. Furthermore, asset soundness has deteriorated due to the increased household debt burden, leading to higher loan loss provisions. Last year, loan loss provisions reached 3.6 trillion KRW, increasing by 1.5 trillion KRW over the past two years. In contrast, card revenues increased by only 2.6 trillion KRW during the same period, falling short of the combined interest and loan loss expenses of 3.4 trillion KRW.

Warning signs are also appearing in card companies' soundness. As of the end of December last year, the combined delinquent amount of seven specialized companies was 2.7 trillion KRW, up 700 billion KRW from the previous year. Moreover, the amount of assets on which credit card companies conducted sales or write-offs after delinquencies of one month or more reached 4.6 trillion KRW last year, an increase of 1.6 trillion KRW from the previous year. This indicates that more than 7 trillion KRW of credit card assets experienced delinquencies of one month or more last year. Considering that the average for the same period from 2017 to 2022 was 4.5 trillion KRW, this shows emerging problems in households' principal and interest repayments.

Kim Sungjin, Senior Researcher at NICE Credit Rating Agency's Financial Evaluation Division 2, said, "Card companies are still managing business and financial risks stably due to their excellent business base and cost management," but added, "If household debt problems worsen under these circumstances, credit risk for card companies will increase." He emphasized, "Unlike corporate loans or PF loans, household loans do not allow for pinpoint management of specific companies or business sites. Once problems begin to surface, it may be difficult to reverse the trend, so continuous caution is necessary."