- Published 2026.11.05 09:12
NPL balance surges to 14.32 trillion won at end of Q3
Risk-weighted assets swell on government SME lending push
Double whammy in defending 13% CET1 ratio, shareholder return threshold
The non-performing loans (NPLs) of Korea's four largest financial groups—KB Financial Group, Shinhan Financial Group, Hana Financial Group and Woori Financial Group—have surpassed 14 trillion won (about $10 billion), rapidly thinning their loan-loss provision buffers. With financial authorities adding pressure to expand lending, banks are caught in a dilemma of surging risk-weighted assets (RWAs). While touting record earnings and value-up programs on the surface, they are internally facing a structural contradiction that is eroding their loss-absorbing capacity.
According to the financial industry on Nov. 5, the four groups' substandard-or-below loans (NPLs) stood at approximately 14.32 trillion won (about $11 billion) as of the end of the third quarter this year. That is a 20.0% surge in just nine months from the end of last year. The increase reflects accumulated delinquencies among marginal small and medium-sized enterprises (SMEs) and vulnerable self-employed business owners amid a prolonged high-rate environment and economic downturn.
As loan-loss provisions have failed to keep pace with the growth in NPLs, the NPL coverage ratio—a key asset soundness indicator—has deteriorated markedly. The average NPL coverage ratio of the four groups fell to 111.9% at the end of the third quarter, down 11.5 percentage points from 123.4% a year earlier. Hana Financial Group saw its ratio plunge to 90.2% from 105.0% over the same period, falling below the 100% level generally recommended by authorities. Woori Financial Group also dropped to 112.7% from 130.0%, while KB Financial Group (129.3%) and Shinhan Financial Group (115.5%), which have relatively stronger buffers, also saw declines.
The real flashpoint pressuring bank soundness is a head-on collision with the government's so-called productive finance policy. Authorities are strongly urging commercial banks to expand lending to SMEs and regional companies under the rationale of curbing household loan concentration and revitalizing local economies. Financial Services Commission (FSC) Chairman Lee Eok-won held the sixth productive finance transformation meeting on Nov. 2 and announced a plan to supply 4.5 trillion won (about $3.3 billion) in guaranteed loans to regional SMEs and mid-sized enterprises over the next three years.
The problem is that SME credit carries a much higher probability of borrower default than mortgage loans backed by prime collateral, so it is assigned harsher risk weights under capital regulations. While ordinary mortgage loans have risk weights of 20–25%, loans to low-credit, non-prime SMEs can be assigned risk weights of up to 150%. The more banks expand corporate lending in line with policy direction, the more their RWAs inevitably balloon exponentially.
This expansion of RWAs also undermines the credibility of shareholder return policies that financial groups have promised to the market. The common equity tier 1 (CET1) ratio—the absolute benchmark for gauging capacity for dividends and share buybacks and cancellations—is calculated by dividing core capital by RWAs. Banks are in a position where they must additionally deduct loan-loss provisions from capital, the numerator, due to rising NPLs, while the denominator, RWAs, is also inflated by the lending expansion policy—trapping them in a 'capital trap.'
Major financial groups have set a CET1 ratio of around 13% as their Maginot Line and pledged to return excess capital to shareholders. The four groups managed to defend the 13% level in the second and third quarters of this year, but only because record net profits significantly boosted capital, the numerator. If RWAs continue to grow structurally due to sustained lending and investment, it will become difficult to defend the 13% line with net profit alone.
Banks are strongly demanding easing of risk-weight calculation methods and expansion of public guarantees. If they are forced to pursue loan-volume-driven policies alone, banks whose soundness buffers have collapsed will face a high risk of bearing the full brunt of the next economic shock.
Ultimately, the key is how stably financial groups can manage soundness while chasing two rabbits: shareholder returns and productive finance. Whether the government concretely prepares institutional safety nets such as fine-tuned risk-weight adjustments or public guarantee system reforms, and whether the four groups successfully defend the 13% CET1 ratio—their shareholder return threshold—in year-end financial statements will be the critical indicators of success or failure.
(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.
