Korean Banks’ Household Bad-Loan Ratio Rises to Near 6-Year High

South Korean banks’ ratio of soured household debt to total lending in the category rose to almost a six-year high in June as the country’s slowing economy weighed on property values.

The ratio for all of the country’s 18 lenders jumped to 0.76 percent, the highest since September 2006, from 0.71 percent in March, the Financial Supervisory Service said in an e-mailed statement today.

The FSS plans to toughen its quality review of loans extended to households and industries vulnerable to further economic slowdown caused by the European debt crisis or slowing growth in China, it said today. Financial Services Commission Chairman Kim Seok Dong told lawmakers last month that while the country’s household debt is manageable, problems overseas could potentially threaten South Korea’s economy.

Banks’ bad-debt ratio for all loans narrowed to 1.49 percent in June from 1.51 percent at the end of March as banks wrote off and sold non-performing loans, the regulator said. It recommended banks set a target ratio of 1.3 percent for 2012.

The country’s lenders will submit their own target based on the regulator’s recommendation, it said. The FSS defines non- performing loans as debt past due by least three months.

Profit at the country’s banks sank 59 percent in the second quarter as they booked additional provisions to weather the government’s reduced growth forecast of 3 percent this year.

Loans newly classified as non-performing increased to 6.9 trillion won ($6.1 billion) in the April-June period, the most since the third quarter of 2010, the FSS data shows. Total bad debt stood at 20.8 trillion won at the end of June, compared with 20.9 trillion won in March.

Woori Finance Holdings Co. (053000)’s Woori Bank unit had 1.77 percent of bad loans out of its total credit as of June, the highest among seven national lenders, according to the FSS statement. The ratio for Hana Financial Group Inc. (086790)’s bank unit was 1.03 percent, the lowest among the national banks.

To contact the reporter on this story: Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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