Since August 2009, Korea’s financial authorities have been encouraging domestic banks to lower their average SBL (substandard or below loans) target ratio to 1% by end-December 2009.
As of end-December 2009, domestic banks’ SBL ratios averaged 0.99% to meet their target ratios, excluding the KRW3.0 trillion in debt obligations that arose in December from the unexpected workout of the Kumho Group affiliates and a number of shipbuilders*.
*Kumho Industries, Kumho Tires, SLS Shipbuilding, 21st Century Shipbuilding, etc.
When setting the target ratio, corporate restructuring-related SBLs were allowed to be
taken out of calculation because they were expected to take longer to resolve through sales, dispositions, and other means.
If these corporate restructuring-related SBLs are included, the average SBL ratio is 1.22%.
The SBLs resolved in H2 2009 during the targeting period were KRW17.7 trillion, an increase of 47.5% over the KRW12.0 trillion resolved in H1 2009.
Detailed Figures
Domestic banks’ end-2009 SBL ratios inclusive of the large restructuring-related debt of KRW3.0 trillion in December was 1.22%, dropping sharply by 0.29 percentage points from the end-June 2009 ratio of 1.51% on the back of support to lower SBL.
In terms of amount, the total SBLs were KRW15.7 trillion, down KRW3.9 trillion or
19.9% from KRW19.6 trillion at end-June 2009.
By class, the SBL ratios of both corporate and household loans each fell by 0.33 and 0.16 percentage points respectively in H2 2009 to 1.58% and 0.48%.
The SBL ratio of small and medium-sized enterprises (SME) was 1.82%, falling by a significant 0.67 percentage points during H2 2009. The SBL ratio of household and mortgage loans, meanwhile, was 0.48% and 0.37% respectively, the lowest levels for both since figures began to be kept for both in March 2002 and December 2005.
In 2009, domestic banks resolved KRW29.7 trillion in SBL, double the KRW14.0 trillion resolved in the preceding year.
Of the KRW29.7 trillion, KRW9.5 trillion was resolved through write-offs, KRW5.8 trillion through collateral dispositions, KRW5.0 trillion through normalization, KRW4.1 trillion through loan sales, and KRW3.8 trillion through securitization.
Assessment
The impact of the global financial crisis, the corporate restructuring drive, and other influences increased new SBLs to KRW30.7 trillion in 2009, sharply higher than the KRW12.0 trillion in 2007 and KRW20.9 trillion in 2008. However, the SBL ratios are stabilizing on a downward trend as banks have taken an active approach to their resolution.
Our assessment conclude that domestic banks have been proactive in resolving SBLs despite the jump in corporate workout-related SBLs following the three rounds of credit risk evaluations on SMEs in H2 and intensified restructuring of large companies in December as well as the sharp increase in loans being classified as non-delinquent SBLs on the basis of the forward-looking criteria (FLC).
To improve their role as financial intermediaries for capital and augment the basis for long- term earnings, banks will be encouraged to further enhance their asset soundness by strengthening their credit risk evaluations and active SBL resolutions.
*Please refer to the attached PDF for details.