[Donmaekgyeonghwa] "Banks Should Selectively Support Prime PF"... 2nd Financial Sector PF Default Risk Remains

Concerns Persist Among Small and Medium Financial Firms with High PF Loans in Securities and Capital

"Banks Should Distinguish Between Prime and Non-Prime PF Projects and Ensure Completion of Prime Projects Through Loans"

[Asia Economy Special Reporting Team] The government’s decision to supply over 50 trillion won in liquidity to stabilize the financial market is expected to resolve the short-term liquidity issues in the financial market. While liquidity risk problems will be alleviated, concerns over credit risk remain due to the deterioration of the feasibility of real estate project financing (PF) projects and the possibility of unsold units amid the real estate market downturn and interest rate hikes. Anxiety also persists regarding the second-tier financial institutions such as securities firms and capital companies with large PF loan portfolios.

In addition to the government’s market stabilization measures, there are calls for banks, which have strong financial capacity due to record-high earnings, to actively step in. It is argued that among PF projects, high-quality and non-high-quality projects should be distinguished, and loans should be supported to ensure the completion of high-quality projects.

The reconstruction site of Dunchon Jugong Apartment in Gangdong-gu, Seoul. [Image source=Yonhap News]

Continued Anxiety Among Small and Medium-Sized Financial Firms with Large PF Loans such as Securities and Capital Companies

Although the government’s liquidity support has extinguished the immediate fire, the market views that the risk of insolvency among small and medium-sized financial firms remains high, necessitating continuous monitoring and support measures.

The proportion of mezzanine and subordinate real estate PF loans in small and medium-sized securities firms was more than twice that of large firms. Mezzanine and subordinate loans are those repaid after senior lenders have been paid first; in case of PF defaults, these loans carry a higher risk of loss.

According to the business reports submitted by securities firms to the Financial Supervisory Service (FSS) in the first quarter and a survey by Korea Ratings, the average proportion of mezzanine and subordinate PF exposure in small and medium-sized securities firms was 78%. This is more than twice the average proportion of 35% in large securities firms.

Seven firms?IBK Investment & Securities, DB Financial Investment, Daol Investment & Securities, Hanwha Securities, Hi Investment & Securities, BNK Investment & Securities, and SK Securities?had mezzanine and subordinate proportions higher than the average (78%). Four securities firms were found to have no senior loans at all.

A securities firm official said, "If the PF cannot be entered, sometimes the loan maturity is extended, but depending on contract terms, loan recovery may be initiated. If the developer cannot repay the loan at that time, the project site goes to auction, and securities firms involved in mezzanine and subordinate loans may incur losses."

The capital industry, which has expanded corporate and investment finance businesses such as real estate PF in recent years, is also experiencing significant anxiety.

According to NICE Credit Rating, as of the end of March, the actual exposure to real estate development projects among 18 surveyed capital companies was 23.6 trillion won. This figure greatly exceeds the real estate PF loan amount (18.1 trillion won) disclosed in each company’s business report.

This is because a significant portion of PF and bridge loans are classified under general loans. Specifically, bridge loans amount to 3 trillion won, real estate secured loans within general loans total 4.9 trillion won, and PF loans reach 15.6 trillion won.

Since the second half of the year, as real estate development projects nationwide have begun to falter, the sense of crisis has intensified. Industry insiders explain that in many projects nationwide, even those at the level of loss of benefit of time (EOD) are reluctantly granted maturity extensions.

An official from a small to medium-sized capital company said, "Even if a buyer appears for a project site auctioned off, it is a reality that there is no way to obtain a loan to acquire it," adding, "Managing financial statements is important, but selling land with a cost of 100 won at 10 to 20 won causes huge losses, so many reluctantly extend loans while waiting for economic recovery or loan resumption next year."

Apartment complex viewed from Lotte World Tower Seoul Sky in Songpa-gu, Seoul [Image source=Yonhap News]

"Banks Should Lend to High-Quality PF Projects..."

Although the real estate PF market is facing difficulties, commercial banks are reportedly struggling to supply funds even to high-quality projects. The banking sector points to conflicting signals from financial authorities as the main issue. The Financial Supervisory Service (FSS) sends external messages encouraging support for high-quality projects, but the actual guidelines on the ground are contradictory.

FSS Governor Lee Bok-hyun emphasized on the 14th, "Please enhance project feasibility evaluations and encourage smooth funding for sound PF projects," but FSS staff reportedly act differently. A financial sector official said, "FSS staff pressure banks by saying they will not tolerate even a single loss in PF investments, causing banks to become cautious. As a result, banks tend not to roll over loans upon maturity and instead recover them immediately regardless of the PF project’s status." This cautious approach by financial authorities risks damaging even high-quality projects.

Currently, financial authorities are assessing the quality of real estate PF projects on a case-by-case basis, but there is an opinion that banks, which control the funds, should take the lead in selective support, which should be the key to policy. A commercial bank official said, "No matter how much the government scrutinizes, no one can evaluate project feasibility as accurately as the banks that directly provide PF loans. The order should be for banks to first support high-quality PF projects with loans to save them, and then the government should handle the remaining distressed projects."

Even if interest rates rise further and some PF projects invested in by commercial banks become distressed, banks, which have posted record-high earnings since last year, are considered to have sufficient shock absorption capacity. A financial sector official said, "Financial authorities should support banks to directly enter the PF market and act as firefighters to save high-quality projects," adding, "Measures such as liquidity coverage ratio (LCR) exemptions or easing loan-to-deposit ratio regulations are insufficient to calm the unstable market."