Middle East Unrest, Rate Hikes Fuel Bank Delinquency Concerns

Amid recent Middle East instability and widespread interest rate hikes, businesses are facing operational difficulties, leading to an increase in cases of delayed loan repayments to banks. This situation heightens the risk of loan defaults for financial institutions and adds pressure to the broader financial market.

The yield on the 3-year government bond surged to 3.582% on the 23rd of last month, marking the highest level since December 1, 2023 (3.587%). The monthly average yield for March was 3.378%, an increase of over 0.78 percentage points compared to 2.590% in the same month last year. Following the decision to freeze the benchmark interest rate on the 10th, Bank of Korea Governor Rhee Chang-yong stated in a press conference that the 3-year bond yield is currently fluctuating between 3.3% and 3.5%. He also noted that market expectations, based on available data, seem to anticipate approximately two rate hikes by the end of the year.

According to the Bank of Korea's March Business Survey Index (BSI), the overall industrial BSI stood at 94.1, a 0.1 percentage point decrease from the previous month. The BSI for small and medium-sized enterprises was 94.3, falling short of the Bank of Korea's forecast of 97.0, indicating a worsening economic sentiment among businesses.

Against this backdrop of economic conditions and interest rate movements, the delinquency rate for the five major banks' won-denominated loans rose to 0.46% by the end of February, an increase of 0.1 percentage points from 0.36% at the end of December last year. The delinquency rate for credit card loans among domestic banks also recorded 4.1% in January.

The Bank of Korea has forecast that despite a recovery in the semiconductor industry and government spending measures, domestic economic growth is expected to slow more than initially anticipated due to supply shocks stemming from the conflict in the Middle East.