NPLs at 5 major banks hit 7.6133 trillion won, shattering provision defenses

Nonperforming loans at Korea's five largest commercial banks have hit their highest level in eight and a half years, raising alarm bells over asset soundness. While the banks have touted record interest income and strong earnings to pursue balance-sheet growth and expanded shareholder returns, their internal capacity to absorb losses from a deteriorating macroeconomy has weakened to an unprecedented degree.

According to financial industry sources on November 3, the combined balance of substandard-or-below loans (NPLs) at KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, and NH NongHyup Bank stood at 7.6133 trillion won (about $5.6 billion) as of the end of the third quarter, based on disclosures made on November 2. That is up 1.2848 trillion won (about $948 million) from a year earlier and the largest since the first quarter of 2018, a span of eight years and six months. The simple average delinquency rate for loans overdue by at least one month also climbed to 0.42%, the highest level in years.

The flashpoint for bad loans is corporate lending, particularly to small and medium-sized enterprises (SMEs) and self-employed business owners. Prolonged weak domestic demand and high interest rates have pushed marginal borrowers into default. As of the end of the third quarter, the SME loan delinquency rate jumped to 0.77% at Woori Bank, 0.73% at NH NongHyup Bank, and 0.67% at Hana Bank, lifting the average for the banking sector. With the government capping household loan growth, banks shifted their business focus to corporate lending to expand their books, but that strategy has boomeranged amid the economic downturn.

More painful than the increase in the absolute size of bad loans is the sharp drop in the NPL coverage ratio, a key measure of defense against potential credit losses. The ratio compares banks' loan-loss provisions to their NPL balances. Among the five major banks, the buffer ratio collapsed across the board except at KB Kookmin Bank.

Hana Bank's NPL coverage ratio at the end of September was 106.52%, down 29.4 percentage points in a year and the lowest among the five banks. Given that financial regulators view around 100% as a stable threshold, the bank has set aside only 106 won in provisions for every 100 won of NPLs—a precarious level where a single additional default could immediately push it into a provision shortfall. Over the same period, NH NongHyup Bank's ratio plunged 65.9 percentage points to 157.12%, Woori Bank's fell 45.9 percentage points to 126.70%, and Shinhan Bank's stood at 162.50%.

The deterioration in these indicators is not simply an illusion caused by rising NPLs. Despite the major commercial banks posting cumulative interest income of more than 34 trillion won (about $25 billion) through the third quarter of this year—a record—they prioritized defending short-term net profit and securing dividend resources over aggressively booking new loan-loss provisions. Beneath the surface of strong earnings lies a structural vulnerability: insufficient internal reserves to defend against risks.

Beyond the 7.6133 trillion won (about $5.6 billion) in NPLs that has surfaced, potential risks that could detonate at any time remain. Precautionary loans—those overdue by one to three months or with a high likelihood of default—have ballooned to well over 10.5 trillion won (about $7.7 billion) combined across the five banks. If borrowers in vulnerable sectors such as wholesale and retail, construction, and accommodation and food services are pushed into cascading defaults, the pace at which these precautionary loans deteriorate into NPLs is expected to steepen further.

Amid the sense of crisis, some banks plan to temporarily improve their book indicators ahead of year-end closing by writing off large volumes of NPLs or selling them at fire-sale prices to special purpose vehicles. But such measures merely erode equity capital by recognizing losses on loan principal. With the number of potentially distressed borrowers not fundamentally declining and provisioning rates already at rock bottom, merely lowering the headline delinquency rate has clear limits in restoring the banking system's overall capacity to absorb credit risk.

The key factor to watch for the banking sector's fundamentals going forward is how much additional provisioning banks actually and rigorously book during the year-end closing process. If banks whose buffer capacity has fallen to barely above 100% delay restoring their loss-absorption buffers under the pretext of defending earnings, a massive bill for credit costs could arrive all at once in the first half of next year, dealing a severe blow to the creditworthiness and capital adequacy of the entire financial holding companies.

(Dollar figures are approximate, converted automatically at 1,000 won = $0.738, the rate on Nov. 8, 2026.)

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.