More than half of all capital companies are currently unable to cover bad debts with the reserves they have accumulated for bad debt provisions. The worsening market condition due to the impact of non-performing real estate project financing (PF) and the slowdown in the domestic automobile market appears to have led to a decrease in the bad debt provision coverage ratio. A bad debt provision is the amount set aside by financial companies as an expense in preparation for the possibility that loans will not be recovered, and it is deducted from profits.
According to the Financial Supervisory Service on the 13th, among 51 capital companies such as installment finance and leasing companies in the first quarter of this year, 23 companies (45.1%) had bad debt provisions that were over 100% compared to fixed overdue loans. This is a decrease of 9 companies from 32 (62.7%) in the first quarter of last year. This indicates that more than half of the capital companies have more bad debts than the provisions accumulated to prepare for a decline in soundness. Excluding Coupang Financial, which was created to mediate loans for small business owners, the company with the lowest bad debt provision ratio was Pioneer Investment (22%). Meritz Capital (46%) and Volkswagen Financial Services Korea (49%) followed.
Credit finance companies must accumulate bad debt provisions ranging from 20% to 100% according to the degree of fixed overdue loans, and whether to accumulate additional provisions exceeding this range is determined autonomously by each company.
Capital companies are experiencing declining profitability due to the slowdown in the growth of the automobile finance market. As of the first half of this year, the net profit of KB, Shinhan, Woori, and Hana Capital in the first half was 270.2 billion won, down 38.1% from 436.7 billion won in the same period last year. The Ministry of Trade, Industry and Energy analyzed that while automobile sales in the domestic market increased by 2.7% to 388,000 units in the first quarter compared to the same period last year, this is due to a base effect from last year's decline. Last year's domestic automobile sales were 378,000 units, a reduction of 9.6% compared to the previous year. Influenced by the end of new car purchase support and weakened consumer sentiment, this marked the lowest level since 2013.
It appears that capital companies have less capacity to set aside bad debt provisions in line with the increase in their bad debt ratio due to declining profitability. NICE Investors Service reported that in the first quarter of this year, the ratio of major capital companies' fixed overdue assets was 3.9%, a level that has increased by 0.7 percentage points compared to the same period last year. This is the result of an increase in the delinquency rate of non-performing real estate PF loans.
An official from the capital industry noted, "Although the accumulation policies differ by company, many corporations have fallen short of the funds available to allocate to bad debt provisions due to poor market conditions."