BNK Financial's 50% shareholder return pledge faces regional SME bad-loan risk

BNK Financial Group has pledged to achieve a shareholder return rate of 50% or more, but bad loans in general credit centered on regional small and medium-sized enterprises (SMEs) and marginal borrowers are emerging as a new flashpoint. Analysts say the structural deterioration in asset soundness that followed the real estate project financing (PF) shock is fundamentally constraining the group's ability to execute its earnings rebound and shareholder return expansion plans.

BNK Financial Group said on Oct. 26 that its cumulative net profit for the first three quarters fell 19.2% year-on-year to 622.3 billion won (about $459 million). Third-quarter net profit also plunged 28.5% year-on-year to 210.5 billion won (about $155 million).

BNK Financial Group's management cited the base effect from last year's headquarters sale and a sharp drop in non-interest income as the main reasons for the earnings weakness. It then expressed confidence in a fourth-quarter earnings rebound and achieving a nominal shareholder return rate of more than 50% next year, based on easing provision burdens and reversals. But a look inside the financial statements shows the credit risk structure has entered a phase that is far from optimistic.

From a credit rating perspective, the most notable point is the changing nature of the risks that trigger loan-loss provisions. In the past, the provision burdens that shook the financial sector came in the form of large one-off hits at specific times, such as bridge loans from non-bank affiliates or real estate PF sites. By contrast, the provisions weighing on the entire group this year stem from bad loans in general lending to small SMEs, sole proprietors, and marginal household borrowers in the Busan and South Gyeongsang Province region. Large PF provisions can be resolved or reversed at once through the disposal of non-performing loans (NPLs) or project completion. But regional general credit that collapses due to the manufacturing slowdown and economic recession shows a structural tendency for delinquency and bad loans to accumulate quietly and over a long period.

In fact, asset soundness indicators clearly reflect this risk. As of the end of the third quarter, the group's delinquency rate rose another 0.06 percentage point from the previous quarter to 1.40%. The substandard-or-below loans (NPL) ratio also reached 1.45%, still weak compared not only with major financial holding companies but also with other regional financial holding companies. Even as the group writes off and sells bad loans and continues to build up loan-loss provisions, delinquency and potential bad loans within total credit are not being contained. Cumulative loan-loss provisioning in the first three quarters alone reached 595 billion won (about $439 million), already exceeding 80% of the annual provision target of 730 billion won (about $539 million).

The contradiction between management's fourth-quarter outlook and next year's risk management stance is also a source of unease. BNK Financial Group's chief risk officer said at the Oct. 26 earnings announcement that the group expects at least 20 billion to 30 billion won (about $22 million) in provision reversals in the fourth quarter as some borrowers with substandard-or-below loans are normalized. But at the same time, the officer added that the group is reviewing next year's annual provision amount at a level 5% to 10% higher than this year. Even if the fourth-quarter earnings book is filled with temporary NPL disposals or reversals, this amounts to an admission that credit risk will inevitably intensify next year due to the deteriorating debt repayment capacity of regional borrowers.

This qualitative deterioration in credit risk is also putting chain pressure on lending strategy and profitability. To defend against rising delinquency rates, BNK Financial Group has pursued a strategy of increasing the share of relatively safe prime corporate loans and prime borrowers. But amid fierce competition with commercial banks over prime loan rates and rising funding costs, the group's net interest margin (NIM) fell 0.03 percentage point from the previous quarter to 2.03% in the third quarter. The group is trapped in a dilemma: if it increases prime assets to avoid credit risk, margins are eroded, and if it maintains loans to regional SMEs to protect margins, provisioning risk grows.

Ultimately, the plan to achieve a total shareholder return rate of more than 50% depends on whether the common equity tier 1 (CET1) ratio and asset soundness defense lines hold up. As of the end of September, the CET1 ratio rose only 0.04 percentage point from the previous quarter to 12.18%. If the group cannot prove its preemptive loss-absorbing capacity in the prolonged deterioration of general SME credit that hit right after crossing the big mountain of real estate PF, the credibility of the capital policy promised to the market will inevitably be tested. Whether the group can halt the rise in regional general loan delinquency rates and raise its capital ratio to target levels by the first half of next year is the key point to watch.

(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.