Unlike commercial banks criticized for "easy interest business," regional banks are failing to grow. As regional economies slump, arrears rates among small and midsize businesses and the self-employed are rising, and the worst construction downturn has eroded the profitability of real estate project financing (PF).
According to the financial sector on the 23rd, the average arrears rate at the four major regional banks (Busan, Gyeongnam, Jeonbuk, and Gwangju banks) in the first half of this year was 1.07%, up more than 0.4 percentage points from the first half of last year (0.61%). It has surpassed 1%, considered a psychological red line. It is more than three times higher than the 0.34% average at the four major commercial banks. Jeonbuk Bank was the highest at 1.58%, followed by Gyeongnam Bank at 1.02%, Busan Bank at 0.94%, and Gwangju Bank at 0.76%.
In the first half, the four major regional banks posted net profit of 675.2 billion won, more than a tenfold gap with the 4 major commercial banks (Shinhan, KB Kookmin, Hana, and Woori Bank), which recorded 8.0968 trillion won in net profit. The three internet-only banks (Kakao, K, and Toss Bank) posted a record 388.3 billion won over the same period since launch, narrowing the gap with regional banks.
The deterioration in regional banks' profitability and soundness stems from regional small and midsize businesses and the self-employed falling into a slump. As they fail to repay their debts, banks' core net interest margin (the gap between loan and deposit rates) has narrowed, and higher provision build-up has led to lower net profit. According to the Bank of Korea, the loan arrears rate among vulnerable self-employed borrowers in the first quarter of this year was 12.24%.
In fact, more than half of regional banks' loans are to local small and midsize businesses and the self-employed. The four major regional banks' won-denominated loan balance is 143.5872 trillion won, of which 64.3% (92.377 trillion won) are loans to corporations. Notably, 89.9% of corporate loans are to small and midsize businesses and individual business owners among the self-employed.
In particular, as the real estate construction cycle worsens rapidly, centered on regions outside the capital area, non-interest revenue is also deteriorating. As of the first half of this year, of 63,734 dwellings in inventory, 78% (49,795 units) are outside the Seoul metropolitan area. While internet-only banks are growing non-interest income through their platforms, regional banks are struggling to find new businesses to expand non-interest income.
It is also not easy to find a breakthrough through household loans. Regional banks face higher funding expense than commercial banks as well as internet-only banks, so their rates are higher. With more mid- to low-credit borrowers than in the capital area, rates inevitably run high. High-quality financial consumers have already been absorbed by commercial banks and others. Moreover, household loan regulations make it hard to expand lending further.
In fact, based on new lending last month, regional banks' unsecured loan rates were 5.1–12.15%, higher than commercial banks (4.56–4.72%) and internet-only banks (4.73–5.13%). Over the same period, regional banks' mortgage rates were also 4.03–4.81%, higher than those at commercial and internet-only banks.
Against this backdrop, President Lee Jae-myung ordered officials to "consider applying lower rates when taking out loans in the regions," drawing a negative response from regional banks. By nature, they serve mid- to low-credit customers, small and midsize businesses, and struggling self-employed borrowers, so their rates are inevitably higher, yet a call has been made to lower them. A financial industry source said, "Population decline and an economic slowdown have dampened regional banks' growth."