OREANDA-NEWS. A decision by the creditors of South Korea's Hanjin Shipping Company on 30 August to withdraw financial support for the company was a proactive step towards restructuring the country's shipping and shipbuilding industry, and a sign that troubled entities in this sector will not be propped up indefinitely, says Fitch Ratings.

Fitch believes taking a more commercial approach towards financially ailing large corporates should ultimately bolster the health of the banking sector, and lift Korea's long-term growth prospects. The gradual restructuring of the industry has allowed Korea's commercial banks to position themselves for an outcome resembling Hanjin's and, as a result, it has already been factored into our bank ratings.

Korea's shipping and shipbuilding companies have struggled in recent years as the slowdown in global trade caused severe oversupply in the industry. Hanjin, the country's largest shipping company, has been one of the worst affected. Low oil prices had helped Hanjin make a small profit in 2015, but the company had posted losses in each of the previous five years and had debts of KRW6.1trn (USD5.4bn) as of end-June 2016. Earlier this week, Hanjin's creditors, led by the Korea Development Bank (KDB; AA-/Stable), rejected the company's plan to raise KRW500bn, partly through asset sales, as being insufficient to deal with its financial problems, forcing Hanjin to file for court receivership on Wednesday. Fitch expects Hanjin to be liquidated eventually.

The vice chairman of the Financial Services Commission (FCC), Jeong Eun-bo, has said that the FCC will urge one of Hanjin's rivals, Hyundai Merchant Marine Company, to acquire some of Hanjin's assets, which would help to limit creditors' losses. Hyundai itself has entered into a debt restructuring programme, which has included a debt-for-equity swap with its main creditors.

We estimate around 12% of Korea's banking system loans to the shipping and shipbuilding sectors were non-performing at end-June 2016 (the banking system: 1.7%). This is likely to increase further, given that we estimate the "precautionary-and-below" loan ratio has jumped to 38%, from 17% at end 2015, following the reclassification of exposure to Daewoo shipbuilding into this category from "normal". More positively, provisions for bad loans by the sector have also been increased.