NongHyup Bank will set aside more funds for loans that may turn sour in the next two years, in a preemptive measure to improve asset quality, the head of its parent NH Financial Group said Tuesday.

NH Bank, as it is known, was a major drag on the group’s balance sheet in the first quarter of this year, reporting net profits 65 percent lower from a year earlier on a sharp increase in its loan-loss provisions.  

“We have recently conducted a sweeping review of the loan quality and sorted out loans that run the risk of turning sour in the next two years,” Kim Yong-hwan told a press conference.

“We’ll make a ‘big bath’ provision to cover any deterioration of those loans, even if it leads to a significantly smaller profit or even a turn to losses,” he said. “It is a wall that we must surmount to move forward.”

Big bath is an accounting strategy of recognizing expected expenses and losses early in the current year to make the following year look better.

Kim, who assumed office a year ago with two more years remaining in his term, refused to disclose more details about the plan, including the amount of the envisioned provision or the timing of its implementation.

“It’s going to be sometime in the next two years, while I am in office.”

In the January-March period, NH Bank set aside 332.8 billion won in provisions for its loans extended to Changmyung Shipping, STX Offshore & Shipbuilding and Hyundai Merchant Marine.

That followed the previous quarter’s provisions of a whopping 760 billion won, including some 500 billion won for STX Offshore debt.

“First-quarter results were not good and I can’t say the current or next quarters will be any better,” Kim said.

The chief, who, before joining NH, ran the state-run Export-Import Bank of Korea, said he was trying to make the current challenge a turning point for the group and steer it toward a longer-term, quality-driven growth.

“You could say that NH so far had pursued external growth. But the road ahead is awash with strife and uncertainty. We can’t stick to that strategy. We have to grow with quality,” Kim said, stressing risk control and asset quality management.

NH Financial ranks No. 2 by assets among Korea’s financial groups, but its profitability and asset quality are considered to be lagging its peers. Wholly owned by the National Agricultural Cooperative Federation, the group has been giving a portion of its profits to the stakeholder in the form of a brand fee, 14 basis points of its average total assets in 2014, and dividend payouts. 

By Lee Sun-young (milaya@heraldcorp.com)