[금안보고] Stress test results, business loans are more risky than households

Bankruptcy rate rises Households 0.36%p Financial institutions capital ratio significantly declines Securities (-124.4%p) and insurance (-40.5%p) Credit spreads surge

Amid the rapid increase in private credits of households and corporations, the analysis results showed that companies are more at risk than households as a result of stress tests.

According to the Financial Stability Report for the second half of 2020, published by the Bank of Korea on the 24th, the household loan default rate rose 0.36 percentage points from 0.96% to 1.32% as a result of the assumption that the economic downturn and financial imbalance adjustments continue. Credit loss also increased by 5.2 trillion won from 13.5 trillion won to 1.87 trillion won.

On the other hand, the default rate for corporate loans surged 0.93 percentage points from 1.36% to 2.29% due to the widening of the credit spread. Credit loss also increased by 22.8 trillion won from 21.3 trillion won to 481 trillion won.

This is because the economic growth rate continues to fall below the BOK estimates (3.0% next year, 2.5% in 2022, and 2.9% in 2023) (0.0%, 0.15, and 0.9%, respectively). We assumed a situation in which the financial imbalance would be adjusted, such as a 3-year corporate bond spread of 193bp, a stock price of 1672 points, and a housing price increase of only 0.1%.

The capital ratio of financial institutions fell considerably, but exceeded the regulatory level in all sectors. However, it is expected that the capital ratio of securities companies and insurance companies will fall considerably. This is because as of the end of the second quarter of this year, the share of securities and insurance companies’ securities accounted for 56.4% and 60.3%, respectively, resulting in large market losses.

Looking at the actual capital ratio decline, banks recorded 0.8 percentage points, savings banks 2.2 percentage points, mutual finance 1.0 percentage points, credit cards 3.3 percentage points, insurance 103.7 percentage points, and securities 319.9 percentage points. Of these, insurance and securities companies’ credit spreads (3-year AA-corporate bonds-government bonds) expanded 40.5 percentage points and 124.4 percentage points, respectively.

Lee Min-gyu, head of the BOK stability analysis team, said, “If you go to the actual bad outlook, you will be left with a question, and the results of the stress test may lead to more insolvency on the corporate side than on the household. It can also act as a deterioration in the soundness of financial institutions.” “Currently, the capital ratio remains in good condition, but some companies are in a very low state. We will have to make efforts to expand capital in advance.”