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(Yonhap Editorial) Banks advised to improve soundness
SEOUL, Sept. 3 (Yonhap) -- Increasing insolvencies in project financing for construction and real estate industries and corporate restructuring are threatening to weaken the financial soundness of local banks.
According to the Financial Supervisory Service (FSS), local banks' bad debt ratio surged to 1.94 percent at the end of June, up 0.46 percentage point from three months ago. In particular, the ratio of non-performing loans to small and medium enterprises (SMEs) reached 3.04 percent as of the end of June, up 0.85 percentage point from three months earlier marking the highest rate since the Asian financial crisis of 1997.
The banks' capital adequacy ratio, or the BIS ratio, a major barometer for banks' financial soundness, declined in the third quarter for the first time in seven quarters. The average BIS ratio of 18 banks fell 0.41 percent in the third quarter to 14.29 percent at the end of June. The ratio, which measures the percentage of a bank's capital to its risk-weighted assets, is not worrisome at present as it is well above the 10 percent level recommended by the International Bank for Settlement (BIS). However, the downturn trend should be noted.
Shrinking profitability of banks is a more significant problem. The total net profits of the 18 lenders in the second quarter dropped to 1.3 trillion won (US$1.1 billion) from 3.4 trillion won a quarter ago.
It would be difficult to expect the soundness and profitability of the banks to improve in the second half. The banks will likely have more bad loans in the latter half due to the restructuring of more insolvent corporations. Additional insolvency in project financings is also expected in the second half.
The red lights for banks' soundness should not be ignored in order that the problem may not develop into a big threat to the national economy.
International credit ratings agency Moody's Investor Service has warned that the Korean property market is expected to get into a protracted recession and those banks which have massive insolvent project financings are feared to be hit hard. Household loans estimated to exceed 700 trillion won also pose a problem in relation with possible hikes in bank interests.
If the local banks' financial difficulties are combined with exterior crises like the double dip in the U.S. economy and European financial crisis, they would bring forth another financial crisis and deal a blow to the Korean economy. Therefore, local banks are advised to improve financial soundness by strengthening risk controls internally before trying to swell their size. The financial watchdog also should reinforce its supervising role of banks' financial soundness.
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