Internet-only banks' sole proprietor loans boomerang, half of operating profit goes to provisions

Sole proprietor loans that internet-only banks aggressively expanded to circumvent household loan regulations are coming back as massive credit costs. KakaoBank and K bank set aside a large portion of their increased third-quarter operating profit as loan-loss provisions, exposing structurally weaker profitability compared with traditional commercial banks.

According to third-quarter earnings data from the financial sector on Nov. 8, KakaoBank and K bank's credit loss provisions for financial assets amounted to 27.5% and 57.7% of their pre-provision operating profit, respectively. That is significantly higher than the 12.2% average of the four largest commercial banks — KB Kookmin, Shinhan, Woori and Hana. KakaoBank is setting aside more than a quarter of its operating profit and K bank well over half to brace for potential bad debt.

KakaoBank's pre-provision operating profit rose about 28% on-year to 264.7 billion won (about $195 million) in the third quarter, but its credit loss provisions jumped 30.9% to 72.9 billion won (about $54 million), outpacing profit growth. Compared with the previous quarter's 56.8 billion won (about $42 million), provisions surged about 28% in just three months. The ratio of provisions to pre-provision profit soared to 27.5% from 22.7% over the same period.

K bank's fundamentals are even more precarious. Its third-quarter provisions rose 15.2% on-year to 60.1 billion won (about $44 million) from 52.1 billion won (about $38 million) and 16.9% from the previous quarter's 51.4 billion won (about $38 million). Its cumulative credit cost ratio was 1.12%, down 3bp from a year earlier but still more than double KakaoBank's 0.54%. The bank is struggling to control borrowers' potential credit risk, with 57.7% of its earnings being eaten up by credit costs.

The fundamental reason credit cost burdens have surged to two to five times the level of traditional commercial banks lies in a structural shift in loan portfolios. As financial authorities intensified pressure to curb household loans and mortgage lending in the Seoul metropolitan area, internet-only banks rushed to shift toward sole proprietor unsecured credit loans and guarantee-backed loans. KakaoBank's sole proprietor loan balance surged more than 40% in a year, exceeding 4 trillion won (about $3 billion) in the third quarter from about 2.8 trillion won (about $2.1 billion) a year earlier.

The problem is that under current International Financial Reporting Standards (IFRS 9), banks must calculate expected future credit losses and set aside provisions as soon as a loan is extended, even before any delinquency occurs. Sole proprietor loans are concentrated with vulnerable borrowers who absorb the shock of an economic slowdown and prolonged high interest rates first, so the assigned default rates and loss rates are far higher than for household mortgage loans. Even if loan books grow by the same amount, the unit of upfront loss costs that must be booked is completely different from the high-quality mortgage loans of commercial banks.

This peculiarity is clearly visible in the gap between KakaoBank's asset quality indicators and its provision charges. KakaoBank's overall delinquency rate fell 0.04 percentage point to 0.49% in the third quarter from 0.53% a year earlier, and its substandard-or-below loans ratio — nonperforming loans overdue by more than three months — also improved to 0.53% from 0.55%. The fact that provisions surged more than 30% even as asset quality indicators improved shows that the credit risk premium embedded in newly added sole proprietor loan assets themselves is enormous, rather than deterioration in existing loans.

K bank, on the other hand, is suffering a double whammy of provision burdens from newly added assets and deterioration of its existing portfolio. K bank's delinquency rate rose to 0.62% in the third quarter from 0.56% a year earlier, and its substandard-or-below loans ratio climbed to 0.60% from 0.54%. The bank's distorted profit structure is hardening as proactive provisions that inevitably accompany asset growth are compounded by weakening repayment capacity among existing borrowers.

The provision-absorbing structure of internet-only banks is likely to become a long-term time bomb when combined with the regulatory mandate on mid- to low-credit borrower lending. To achieve inclusive finance, internet-only banks must maintain about 30% of their average loan balance in mid- to low-credit borrower loans at all times. If the self-employed business slump is prolonged and a large number of sole proprietor loan borrowers fall into marginal self-employment, the pre-accumulated expected loss provisions will inevitably turn into confirmed losses in an instant.

Ultimately, the high-growth equation of internet-only banks, where asset growth directly translated into shareholder value and net profit increases, has come to a halt. The more aggressively they expand loan assets, the more exponentially provisions grow, swallowing up the effect of rising net interest margins (NIM). As they have entered a phase where the pace of credit cost increases outpaces profit generation through asset expansion, the speed of nonperforming loan (NPL) write-offs and sales and the precision of sole proprietor credit evaluation models are expected to become decisive indicators of internet-only banks' fundamental strength.

(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.