KakaoBank's record profit driven by small business loans, but credit costs loom

KakaoBank posted record cumulative earnings through the third quarter, led by small business owner loans amid a regulatory chill on household lending. But beneath the surface, loan-loss provisions jumped more than 30% to brace for potential defaults, flashing a warning sign for future asset soundness management.

KakaoBank said on Nov. 4 that its cumulative net profit for the first three quarters of this year rose 25.2% on-year to 469.8 billion won (about $347 million). Third-quarter net profit came to 141.7 billion won (about $105 million). The key driver behind the performance was small business owner loans. At the end of the third quarter, the outstanding balance of such loans stood at 4.036 trillion won (about $3 billion), up 9.5% from the previous quarter and 46% from a year earlier. Small business owner loans accounted for 58% of the bank's total net loan growth in the first three quarters of this year. In contrast, unsecured credit loans shrank from 19.2 trillion won (about $14 billion) to 19 trillion won (about $14 billion) and jeonse (lump-sum housing deposit) loans from 10.5 trillion won (about $7.7 billion) to 10.3 trillion won (about $7.6 billion) due to household loan总量 management. Even as the banking sector broadly reduced lending, KakaoBank sharply expanded small business credit to sustain growth.

Relatively high interest rates on small business owner loans lifted the net interest margin (NIM) to 2.15%, driving interest income growth. This came despite pressure from rising funding costs, thanks to a steep increase in loan asset yields. On the surface, asset quality indicators also look solid. The overall delinquency rate at the end of the third quarter was 0.49%, down 0.02 percentage point from the previous quarter, and the non-performing loan (NPL) ratio improved 0.01 percentage point to 0.53%. The NPL coverage ratio stood at 214%, maintaining a strong buffer.

But credit cost indicators, which reveal the true nature of credit risk, tell a different story. KakaoBank's third-quarter credit loss provisions totaled 72.9 billion won (about $54 million), up 30.9% on-year and 28.2% from the previous quarter. The cumulative credit cost ratio also rose 0.03 percentage point from the previous quarter to 0.54%. Provisions typically increase as loan balances grow, but a jump of more than 30% on-year and a rising credit cost ratio suggest the inherent risk of the bank's loan book has increased compared with the past when household loans were the mainstay.

Loans to small business owners and self-employed individuals are highly vulnerable to economic cycles and have a high proportion of multiple-debt borrowers, making them sour much faster than household mortgage loans. KakaoBank has kept headline delinquency rates in check by increasing the share of guaranteed and collateralized loans, but if prolonged high interest rates deepen the distress of self-employed borrowers, pressure from credit costs is bound to intensify.

The bank's plan to expand its corporate lending business will also serve as a yardstick for future profitability. This month, KakaoBank launched a mortgage refinancing product for small business owner loans from other banks, and next year it plans to enter the market for guaranteed loans to small and medium-sized corporations through co-lending with Busan Bank. The bank aims to raise the share of corporate loans in its total loan book to 18% by 2030. After completing the acquisition of Maston Capital, for which it signed a share purchase agreement in June, KakaoBank plans to diversify its portfolio into non-bank lending such as auto installment financing and leasing.

However, expanding into corporate and non-bank lending, which carry relatively higher credit risk, could further increase provisioning burdens if it coincides with an economic downturn. Whether KakaoBank can maintain its record profit streak and achieve its targets of a 15% return on equity (ROE) by 2030 and a 50% shareholder return ratio for fiscal year 2026 will depend on its ability to control the actual default rate of its growing corporate loan book. Key factors to watch will be funding cost management in new business areas after the Maston Capital integration and newly reflected delinquency indicators. If borrowers' actual repayment capacity, hidden behind collateral and guarantees, begins to falter, surging loan-loss provisions could come back to erode profitability.

(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.