The amount of bad loans held by local banks surpassed 20 trillion won ($18.4 billion) as of the end of March, raising concerns over lenders’ deteriorating profitability, data showed yesterday.

According to the Financial Supervisory Service, the volume of nonperforming loans held by 18 Korean banks, including Shinhan and Woori, was 20.5 trillion won in March, up 2 trillion won from December. By sector, the volume of bad loans to corporations was 16.6 trillion won, households 3.6 trillion won and credit cards 300 billion won.

A bad loan is defined as debts held by banks that are more than 90 days past due.

Of all loans by local banks, 1.46 percent were classified as bad, up 0.13 percentage point from the first quarter last year. The increase is mainly due to new loans amid debt restructuring by major construction companies.

“Ssangyong Engineering and Construction has applied for a workout program, while others, including STX Engineering and Construction, have requested a corporate reorganization procedure,” said an FSS official. “There are growing concerns that the amount of nonperforming loans may increase even more considering a slowdown in economic recovery in major developed countries.”

The growing amount of bad loans puts additional pressure on the banks’ profitability.

According to a separate report released by the FSS last week, net income of 18 banks in the first quarter was 1.8 trillion won, a 44.9 percent year-on-year drop.

Industry officials note that business conditions for local banks have become more difficult now than in the past due to reduced interest income and a narrower spread between loan and deposit rates. In the first quarter, the amount of year-on-year interest income at banks dropped 900 billion won to 8.8 trillion won.

And with the Bank of Korea lowering the benchmark interest rate by 0.25 percentage point yesterday, banks’ profitability could suffer even more.


By Lee Eun-joo [angie@joongang.co.kr]