[Why&Next] Local Banks' Asset Soundness Hits Worst Levels Since COVID-19 Amid Regional Economic Slump

Six Regional Banks Including iM Bank See Delinquency and Substandard Loan Ratios
Reach or Approach Five-Year Highs Since 2020
Busan and Kyongnam Hit Hard by Manufacturing Downturn in Busan-Ulsan-Kyongnam Region
Jeonbuk and Gwangju Struggle Amid Economic Challenges in Honam Region
iM and Jeju Banks Face Slump in Real Estate and Tourism Sectors

As regional economies experience a downturn, a warning light has come on for the asset soundness of local banks. Related indicators have either reached or approached their highest levels since the COVID-19 pandemic. A closer look at detailed metrics reveals the specific problems facing the economies of each region. As a result, there are calls not only for enhanced risk management but also for policy support aimed at revitalizing regional economies.

According to an analysis by Asia Economy on May 2 of the delinquency rates and ratios of substandard and below loans at six regional banks (Busan, Kyongnam, Jeonbuk, Gwangju, Jeju, and iM) from the first quarter of 2020 to the first quarter of this year, each bank’s figures have either reached or neared their highest levels in five years. The delinquency rate refers to the proportion of loans for which principal and interest payments have been overdue for more than one month, out of the total remaining loan balance. The ratio of substandard and below loans indicates the proportion of loans classified as substandard, doubtful, or estimated loss, out of all loan receivables. Loan receivables are classified into five categories based on soundness: normal, precautionary, substandard, doubtful, and estimated loss. The closer a loan is to estimated loss, the longer the delinquency period or the more difficult it is to recover.

Busan Bank recorded both its highest delinquency rate (0.73%) and ratio of substandard and below loans (1.1%) in five years in the first quarter of this year. The previous highs were 0.68% and 0.96%, respectively, in the second quarter of 2020. Kyongnam Bank posted 0.68% and 0.82%, approaching its highest levels of 0.84% and 1.1% in the first quarter of 2020. The same trend was observed at Jeonbuk Bank and Gwangju Bank, both under JB Financial Group. Jeonbuk Bank’s delinquency rate in the first quarter of this year reached 1.59%, surpassing the previous high of 1.56% in the first quarter of last year. Its ratio of substandard and below loans was 0.98%, the highest since the third quarter of 2023 (1%). Gwangju Bank’s delinquency rate was 0.97%, 0.26 percentage points higher than its previous five-year high of 0.71% in the second quarter of 2023. Its ratio of substandard and below loans also rose by 0.2 percentage points from 0.59% in the second quarter of last year to 0.79%. iM Bank, formerly a regional bank in Daegu, also recorded its highest delinquency rate in five years at 1.09%. Jeju Bank’s delinquency rate and ratio of substandard and below loans have continued to rise since the first quarter of 2023, reaching new highs.

A breakdown of the delinquency rates and ratios of substandard and below loans at each bank reveals the characteristics of the regional economies on which they are based. For Busan Bank and Kyongnam Bank, both under BNK Financial Group and based in the Busan-Ulsan-Kyongnam (BUK) region, the delinquency rate among small and medium-sized enterprises (SMEs) was particularly high. At Busan Bank, the SME delinquency rate drove the overall corporate delinquency rate upward. While the overall corporate delinquency rate was 0.7%, the SME delinquency rate was 0.8%. At the time when the SME delinquency rate was at its highest (0.87% in the second quarter of 2020), the corporate delinquency rate also peaked at 0.79%. The ratio of substandard and below loans was 1.35% for corporations and 0.57% for households. Even at the previous high in the second quarter of 2020, the corporate ratio of substandard and below loans was 1.19%. Kyongnam Bank showed a similar trend.

This phenomenon occurred because SMEs in the manufacturing sector in the BUK region have faced difficulties. In the first quarter of this year, the proportion of manufacturing sector loans in the total won-denominated loan portfolio was 15.8% for Busan Bank and 24.9% for Kyongnam Bank. For Kyongnam Bank, manufacturing accounted for the largest share among all industries, while for Busan Bank, it was the second largest after real estate. Although the BUK region is home to many large manufacturing companies, such as the Hyundai Motor plant in Ulsan, the loan portfolios of these banks are actually focused on first- to third-tier suppliers that do business with these large corporations. As these suppliers encountered economic difficulties, the asset soundness of the banks also deteriorated. According to the Korea Financial Telecommunications and Clearings Institute’s dishonored bill information service, over the past two years, 30 corporations in Busan and 6 in Ulsan had their checking accounts suspended due to defaults and have not yet had the suspension lifted or canceled. Most of these were SMEs with annual sales between 1 billion and 5 billion won.

Jeonbuk Bank and Gwangju Bank, both under JB Financial Group and based in the Honam region, also saw the highest delinquency rates among SMEs, but household delinquency was similarly severe. At Jeonbuk Bank, the corporate delinquency rate was 1.53%, the SME delinquency rate was 1.69%, and the household delinquency rate was 1.62%. At Gwangju Bank, the corporate ratio of substandard and below loans was 0.78%, while the household ratio was 0.75%. The difference between these two figures was only 0.03 percentage points, indicating that households were just as likely as corporations to fall behind on payments. This gap was smaller than that observed at Busan Bank and iM Bank, both based in metropolitan cities (0.78 and 0.64 percentage points, respectively), suggesting that Gwangju residents were more likely to be delinquent than residents of Busan or Daegu. In fact, the Jeonbuk region has seen its population decline, leading to economic stagnation. As the economy loses vitality and businesses disappear, those who remain find it harder to find jobs and are more likely to default on their debts.

Looking at last year’s economic trends in the Honam region, 6,060 people moved out of Jeonbuk. The indices for mining and manufacturing production and for service industry production recorded negative growth at -1.1% and -1%, respectively, while the retail sales index also fell by -4.1%. In addition, the unemployment rate in Jeonbuk was 4.7% in January, exceeding the national average of 3.7%. While there are more businesses in the Gwangju and Jeonnam areas than in Jeonbuk, the local market conditions (weak retail sales and negative growth in construction orders) are unfavorable, and exports have also declined, putting these regions in a situation similar to Jeonbuk.

For iM Bank, under iM Financial Group, unsold housing in Daegu is a major issue. The number of unsold housing units in Daegu after completion (3,252 units) is the highest among non-capital regions. As the number of completed but unsold homes increases, construction companies face liquidity crises. As a result, banks are unable to recover loans or project financing (PF) funds extended to construction firms. iM Bank’s real estate PF exposure has been on the rise since the first quarter of 2023, briefly declining in the third quarter of last year, but increasing again in the first quarter of this year, indicating that the local real estate market has yet to recover.

At Jeju Bank, delinquencies have surged as the tourism industry in Jeju has stagnated. According to Jeju Bank’s loan portfolio, corporate loans account for 70% of all loans, with loans to individual business owners making up 60% of that figure (or 40% of total loans). By industry, loans related to tourism?wholesale and retail, food and accommodation, and service industries?account for about 56%, meaning that loans to individual business owners in the tourism sector comprise the majority of Jeju Bank’s loan portfolio. The average annual number of tourists visiting Jeju was 15 million from 2016 to 2019, but only 12.65 million from 2020 to 2024. As the tourism industry slumped and self-employed business owners suffered, Jeju Bank’s asset soundness was also hit hard.