Bank of Korea Releases Financial Stability Report
NPL Ratio of Savings Banks and Mutual Financial Institutions Reaches 6.8%
Loan Defaults Rise Amid Regional Real Estate Slump
The ratio of non-performing loans (NPLs) classified as substandard or below among domestic non-bank financial institutions such as savings banks and Saemaeul Geumgo approached 7% last year. As the local real estate slump accelerates, the default rate in provincial areas has increased more steeply compared to the metropolitan area. There are concerns that regional defaults could lead to instability across the entire financial sector, warranting close monitoring.
According to the Financial Stability Report released by the Bank of Korea on the 27th, the NPL ratio of non-bank deposit-taking institutions stood at 6.8% at the end of last year. This marks an increase of 2.4 percentage points from 4.4% at the end of 2023 and 2.2% at the end of 2022. Quarterly data from last year shows the ratio peaked at 7.1% in the third quarter before falling by 0.3 percentage points in the fourth quarter. The NPL ratio is a key soundness indicator representing the level of problem loans held by banks.
A significant portion of last year’s increase is attributed to the deterioration in asset quality of project financing (PF) loans, including PF loans and land-secured loans. Excluding PF loans, the NPL ratio drops to 5.6%. The Bank of Korea estimates that out of the 2.4 percentage point increase, 1.0 percentage point is due to PF loan defaults.
By region, asset quality of institutions located in provincial areas has worsened more than those in the metropolitan area. The NPL ratio for savings banks was 10.2% at the end of last year, with 9.8% in the metropolitan area and 12.2% in provincial areas. The year-on-year increase was 2.6 percentage points in the metropolitan area but a much higher 4.7 percentage points in provincial regions. For mutual financial cooperatives (agricultural, fisheries, industrial, and credit cooperatives), the NPL ratio was 5.1% at the end of last year, with 4.5% in Seoul and 5.5% in provincial areas. The increase was 1.5 percentage points in the metropolitan area and 1.9 percentage points in provincial areas during the same period.
Looking at individual institutions, asset quality of savings banks and mutual financial cooperatives located in provincial areas was worse than those in the metropolitan area. At the end of last year, the proportion of savings banks with an NPL ratio exceeding 16% was 27% in provincial areas, significantly higher than 7.1% in the metropolitan area. For individual mutual financial cooperatives, the proportion of cooperatives with an NPL ratio below 6%, indicating relatively sound asset quality, was overwhelmingly higher in the metropolitan area at 72.5%.
A Bank of Korea official analyzed, "The increase in defaults appears to be mainly influenced by the prolonged slump in the local real estate market." In fact, while housing prices in the metropolitan area rose by 1.3% last year, provincial areas with a large accumulation of unsold homes saw declines in the five major metropolitan cities (-2.0%) and eight other cities (-0.2%), continuing the downturn since 2022.
The official added, "Given the differentiated real estate market conditions between the metropolitan area and provincial regions, attention must be paid to the deteriorating asset quality of non-bank deposit-taking institutions located in provincial areas. Especially, if defaults occur in specific sectors or regions, efforts to improve asset quality and expand liquidity should be strengthened to enhance risk response capabilities and prevent instability from spreading across the entire financial sector."
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