[Shaking 2nd Financial Sector] ① PF Normalization Fund Launch... "Need to Expand Scale and Actively Restructure"

Operation of PF Normalization Fund with Participation of 5 Major Financial Holding Companies
May Be a Temporary Measure... Concerns Over 'Illusion Effect' on Delinquency Rates
"Expansion of Support and Active Restructuring Needed"

Concerns over the insolvency of real estate project financing (PF) in the secondary financial sector (securities firms, savings banks, and capital companies) continue to persist. Although the government has established a bad bank worth about 2 trillion won to clean up distressed projects and activated a PF creditor consortium agreement for project restructuring, many evaluations suggest that these measures are merely a "drop in the bucket" compared to the scale of latent insolvency.

Industry insiders pointed out that since the root of the crisis lies in the real estate market downturn, bold support measures and active restructuring of projects are necessary to build the "stamina" for financial companies to endure until the market recovers.

PF Normalization Fund Launched... Industry Calls It 'A Drop in the Ocean'

According to the financial sector on the 10th, the government-backed 'Real Estate PF Normalization Fund,' formed with private sector participation, will be fully operational starting this month. This fund will purchase non-performing loans at the bridge loan stage before converting them into main PF loans and will promote the restructuring of distressed projects. It essentially functions as a bad bank for real estate PF (an institution that specializes in purchasing and managing non-performing loans or assets of financial institutions).

The fund has seen active participation from five major financial holding companies and other private entities. The Korea Asset Management Corporation (KAMCO)-led KAMCO Fund will start with approximately 1.1 trillion won. KAMCO will invest 100 billion won each in five asset management companies, which will then raise over 100 billion won from financial holding companies to begin bidding on distressed projects. Each financial sector is also forming its own funds. The savings bank sector plans to raise 100 billion won, the capital sector 400 billion won, and the banking sector (Hana, Woori, NH Nonghyup, IBK) 600 billion won each.

Delinquency Rate 'Optical Illusion'... Actual Crisis May Be Larger

However, the industry is skeptical, warning that the fund's scale may be just "a drop in the ocean" compared to the actual scale of insolvency. Since individual projects range from several tens of billions to 300-400 billion won, only a small number of projects can be resolved through this fund.

According to the Financial Supervisory Service, as of the end of the first half of this year, the outstanding real estate PF loans in the secondary financial sector amount to 26 trillion won for capital companies, 10 trillion won for savings banks, and 5.5 trillion won for securities firms. The delinquency rates are also significantly higher than those of banks (0.23%), with capital companies at 3.89%, savings banks at 4.61%, and securities firms at 17.28%. Moreover, the secondary financial sector tends to have lower credit ratings than banks, resulting in higher funding costs and a relatively large proportion of high-yield, high-risk assets such as bridge loans, mezzanine and subordinate loans, and non-metropolitan/non-residential real estate financing.

In particular, the current delinquency rate may be an "optical illusion," which heightens concerns in the secondary financial sector. This is attributed to the government's successive market soft-landing measures, such as the PF creditor consortium agreement, which have led to loan maturity extensions and interest payment deferrals for delinquent or at-risk projects.

An official from the secondary financial sector said, "Nationwide, the estimated PF loan amount for distressed projects is around 60 to 70 trillion won, so the 2.2 trillion won fund is just a drop in the bucket," adding, "Since the KAMCO Fund, composed of private investors, must consider the interests of limited partners (LPs), it is likely to purchase only volumes that the market can absorb, and the funds formed by each sector may end up buying only promising projects within their own portfolios. Therefore, it is questionable whether these funds will have any real impact on projects that truly need capital injection."

Recently, Saemaeul Geumgo, known as a major player in the PF market by participating as a senior creditor in many projects, has shown signs of asset reduction by withdrawing from distressed projects after experiencing a bank run (mass withdrawal of deposits), tightening the market situation further, according to industry sources.

For example, in the capital sector, about 40% of PF loans are made as subordinate loans, so if senior financial institutions like Saemaeul Geumgo declare an event of default (EOD), it is difficult to avoid losses. Additionally, the recent 'Sunsal Apartment' incident is another factor tightening the grip on the secondary financial sector, which has a high PF exposure.

September Crisis Rumors May Repeat... Expansion of Support and Active Restructuring Needed

The industry warns that under the current conditions, crisis rumors in September could repeat in December and March. Jo Dohyung, head of the Credit Research Team at Shinhan Asset Management, explained in a recent report, "PF risk is not being resolved through government support but rather postponed by extending maturities and providing liquidity support, delaying the point at which insolvency is confirmed," adding, "Financial instability due to PF is expected to persist as a stress factor until next year."

Therefore, there are calls for bold support and active restructuring. A financial sector official said, "Currently, time is being bought through the PF creditor consortium agreement, and the PF normalization fund is being used to show progress in project restructuring, but this situation cannot continue," emphasizing, "The fund size should be significantly expanded to rescue projects that can resume operations anytime during the real estate market recovery, and for some local PF projects or commercial real estate projects with poor viability, a bold divestment is necessary. Overall, a comprehensive restructuring of projects is required."