Korean financial groups' record half-year profit came with thinner cover for bad loans

Take the 2.1 trillion won rise in financial investment profit out of the 2.2 trillion won increase and 0.1 trillion won is left, growth of about 0.6% on last year's 15.4 trillion won ^[2][19]. The Seoul Economic Daily tied the investment gain to a strong stock market and wider swings in currencies and interest rates ^[18]. Using the FSS segment shares, which may not match the consolidated basis exactly, financial investment earned roughly 4.4 trillion won in the half against about 2.3 trillion won a year earlier ^[20]. The segment nearly doubled ^[20].

Banks earned roughly 8.3 trillion won on their 47.1% share, down from about 9.1 trillion won ^[21]. Two accounts of the same FSS release disagree on the banks. Yonhap credited the record partly to "the robust performances of their banking and insurance operations" ^[23]. The Seoul Economic Daily breakdown has banking profit down 800 billion won, with insurance up 200 billion won and specialized credit finance up 500 billion won ^[10]. Neither report says what drove the bank decline.

The credit figures went the other way. The nonperforming loan ratio rose to 1.03% from 0.95% six months earlier ^[11], and reserve coverage fell from 106.8% ^[4], so bad loans grew faster than the reserves held against them. Reading the reserve ratio as reserves over nonperforming loans, the product of the two puts reserves at about 1.01% of total lending at end-December and about 0.99% at end-June ^[22].

Capital is the counter-case. The common equity Tier 1 ratio at the eight bank holding companies rose to 13.36% from 13.15% ^[12], and the two non-bank holders, Korea Investment and Meritz, held 162.49% of required capital ^[14][8]. At 1.03%, bad loans are about one won in every hundred lent ^[3]. If markets hold, investment income keeps covering weaker bank earnings and bad loans level off near 1%. If markets turn, the investment gain can reverse in the same months that provisions have to catch up with bad loans, and both hits land on net profit. Or the first-half fall in coverage is timing, and it recovers as new bad loans slow.

I think the second path is the one to plan for, or rather the one the regulator is already planning for. The FSS said rising bad loans and a bigger share of market-sensitive businesses such as financial investment mean subsidiaries need tighter soundness management ^[15]. "We will review latent risk factors such as the expansion of high-risk assets stemming from portfolio changes within holding companies, and step up monitoring of unsound business practices," an FSS official said ^[17]. The groups ended June with 355 affiliates, up from 342 six months earlier ^[7]. The view is wrong if year-end data show coverage back above 100% and bank profit no longer falling.