Banks Expand Corporate Loans Despite 'Negative Interest Margin' Concerns

Located in Changwon, Gyeongsangnam-do, small and medium-sized enterprise A recently switched from using a loan with an interest rate in the 5% range from IBK Industrial Bank of Korea to a commercial bank. A received offers of annual interest rates in the 3-4% range from several commercial banks around the time their loan with IBK was due, and moved to the bank offering the lowest rate of about 3.2%.

Despite concerns about 'negative interest margins,' banks are lowering loan interest rates and aggressively expanding corporate lending. This is because the strong household debt management policy by financial authorities has stifled growth, reducing places to allocate funds. Especially for regional businesses, IBK or local regional banks have traditionally been the main lenders, but recently commercial banks have intensified competition by leveraging cheaper funding costs compared to regional banks to aggressively pursue business.

According to the banking sector on the 28th, the combined corporate loan balance (including large and small-to-medium enterprises) of the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) stood at KRW 830.371 trillion as of the end of last month, an increase of KRW 66.0551 trillion (8.64%) compared to the same month last year (KRW 764.3159 trillion). It also rose by KRW 60.226 trillion (7.82%) compared to the beginning of the year (January 2024), when it was KRW 770.145 trillion.

Among the five major banks, Shinhan Bank saw the largest increase in corporate loan volume over the past year (October 2023 to October 2024). While KB Kookmin Bank has the largest corporate loan portfolio, Shinhan Bank led in growth, increasing by KRW 20.5783 trillion in one year. Woori Bank followed with an increase of KRW 20.1243 trillion.

As banks have recently increased corporate lending and competition has intensified, the competition to lower loan interest rates to attract high-quality corporate clients has also intensified. In cases like SME A, high-quality companies receive offers of lower interest rates from banks timed with their loan maturities. Since corporate loan services are largely similar, interest rates are the only differentiating factor.

The background of this cutthroat competition among banks is that household loan growth has stalled, and attracting corporate clients brings additional benefits such as opening salary accounts for employees, recruiting new loans, issuing credit cards, and managing IRP retirement pension accounts, all of which generate non-interest income.

A representative from a regional bank said, "For regional banks, corporate loans to local businesses are larger than personal loans. While we used to compete mainly with IBK, now we also have to compete with commercial banks that aggressively market themselves using lower funding costs as a weapon. Since the beginning of this year, there have been frequent cases where companies that had dealt with regional banks have switched to commercial banks or IBK offering lower interest rates."

Recently, there are also signs that banks are adjusting corporate lending. To raise the Common Equity Tier 1 (CET1) ratio, which is the basis for shareholder returns in value-up plans, banks need to manage risk-weighted assets (RWA). RWA is calculated by categorizing bank assets by type and reflecting their risk level, and managing RWA requires controlling the expansion of high-risk assets. Corporate loans tend to be riskier than household loans.

Because of this, there are concerns about market distortions even in corporate lending. A representative from a commercial bank said, "In corporate lending, loans should go to companies that truly need funds, but for risk management reasons, loans often go mainly to stable large corporations."