[Geuman Report] BOK "Non-bank Soundness May Be Swayed by Real Estate... Need to Manage Funding Risk"

Bank of Korea H2 Financial Stability Report
Non-bank Corporate Loans Nearly Half in Construction and Real Estate
Deposit Maturities Concentrated in H1 Next Year... Need to Enhance Funding Stability

As real estate-related loans by non-bank deposit-taking institutions increase, concerns have been raised that fluctuations in real estate prices could excessively impact financial soundness.

According to the "2023 Second Half Financial Stability Report" released by the Bank of Korea on the 28th, the proportion of construction and real estate industries in non-bank corporate loans reached 47.4% as of the end of the third quarter this year.

The scale of non-bank corporate loans more than doubled from 151 trillion won at the end of 2019 to 323.9 trillion won at the end of the third quarter this year. Among these, the share of construction and real estate industries is 24% for banks, while for non-banks it approaches twice that amount.

The non-bank share of housing mortgage loans and non-housing mortgage loans at the end of the third quarter also increased by 2.4 percentage points and 1.6 percentage points, respectively, compared to the end of the first quarter of 2020, reaching 21.6% and 34.9%.

The Bank of Korea expressed concern, stating, "Concentration of loans in specific sectors such as real estate lowers the marginal productivity of funds and means that the soundness of deposit-taking institutions could be excessively affected by fluctuations in real estate prices."

In particular, for non-banks, non-performing loans (34.4 trillion won) have surged rapidly in a short period, exceeding loan loss provisions (24.5 trillion won), indicating the need to strengthen additional loss absorption capacity, according to the Bank of Korea's assessment.

Especially since deposit maturities are concentrated in the first half of next year, there is a recommendation for close monitoring of funding stability.

The total deposits maturing in the first half of next year (based on time deposits) are expected to increase by 23% compared to the average quarterly amount in the first half of the past three years (204 trillion won), reaching 251 trillion won for banks, while mutual finance institutions are estimated to increase by 44.2% to 125 trillion won, about half the size of banks.

During the period of rising interest rates, competition for deposits increased the non-bank share of deposits from 41.4% in the first quarter of 2021 to 55% in the first quarter of this year. The non-bank share of total savings deposits at deposit-taking institutions has also steadily risen, reaching 34.8% in the third quarter of this year.

Delinquency Rate on Commercial Real Estate Secured Loans Rapidly Rising, Centered on Non-Banks

For non-banks, the delinquency rate on commercial real estate secured loans is also rapidly increasing. This is due to market sluggishness caused by delayed economic recovery, expanded supply of commercial real estate, changes in consumption patterns, and rising interest rates.

According to the report, the delinquency rate on commercial real estate secured loans for banks remained very low at 0.2% as of September this year, continuing a low level since 2017, but for non-banks, the delinquency rate rose rapidly to 4.4%.

The Bank of Korea pointed out, "By type, contraction is centered more on logistics centers and shopping malls rather than offices," and added, "The volume of high LTV (loan-to-value) loans by non-bank financial institutions has increased compared to the past, and rental yields have been declining since last year, indicating that the risk of default on commercial real estate secured loans is higher than before." The average sale price per unit area (㎡) of domestic commercial real estate was 5.86 million won as of the third quarter this year, down 5.6% from the peak of 6.21 million won in the first half of last year, and transaction volume also decreased by 26.7% year-on-year to 58,000 cases.

While the likelihood of large-scale defaults across the financial sector is relatively low, the possibility of loan defaults related to commercial real estate is increasing due to continued oversupply and delayed economic recovery. Therefore, proactive measures such as strengthening loan loss provisions are necessary for financial institutions.

The Bank of Korea stated, "From a fund management perspective, deposit-taking institutions with significant exposure to real estate should actively manage risks," and warned, "In a situation of high uncertainty in the real estate market, passive management such as reluctance to sell or dispose of non-performing assets could lead to an expansion of the scale of defaults."