[Geuman Report] Real Estate PF Defaults, Increased Risk of Spillover to Securities and Capital

Large Exposure to Real Estate PF by Small and Medium Securities Firms and Capital Companies

Concerns are growing that the real estate project financing (PF) defaults in the construction industry could spread to the financial sector, including securities firms and capital companies. Since the burden on the financial sector increases as real estate PF defaults grow, there are calls for proactive restructuring of troubled PFs.

On the 28th, the Bank of Korea released its Financial Stability Report, emphasizing that the risk of losses for financial institutions with high exposure to real estate PF could increase due to the downturn in the real estate market.

The Bank of Korea analyzed that among financial institutions, securities and capital industries have significant potential risks related to real estate PF.

Among securities firms, small and medium-sized securities companies showed high exposure to real estate PF risks. As of the third quarter of this year, the non-performing loan ratio (NPL ratio) for real estate PF in domestic small and medium-sized securities firms was 2.5%, a sharp increase from 0.5% recorded in the third quarter of last year.

A higher NPL ratio indicates a larger proportion of bad loans expected to be difficult to recover. This suggests that as real estate PF defaults increased, the bad loans of small and medium-sized securities firms also rose. In contrast, the NPL ratio of large securities firms was stable at 0.1% as of the third quarter of this year.

The proportion of subordinated and junior bonds with a high likelihood of debt guarantee realization (loss) was also higher for small and medium-sized firms at 74.1% as of the end of the third quarter, compared to 29.3% for large securities firms. The Bank of Korea assessed that if real estate PF defaults increase, the demand for funds by small and medium-sized securities firms to fulfill guarantees could rise more than expected due to debt guarantee realization.

Specialized credit finance companies (SCFs) were also significantly exposed to real estate PF risks. As of the third quarter of this year, SCFs’ outstanding loans for real estate PF reached 26 trillion won. Among these, the NPL ratio was 3.8%, a sharp rise from 1.6% at the end of last year.

Capital companies, which account for 92.5% of SCFs’ real estate PF loans, showed considerable risk exposure. The Bank of Korea stated that if the improvement in the soundness of real estate PF loans is delayed, capital companies’ funding costs could increase.

As real estate PF defaults grow, the risks to the financial sector are expected to increase. Financial institutions assessed as having insufficient loss-absorbing capacity may face difficulties in liquidity management if deposits are withdrawn, alongside concerns about asset quality deterioration.

The Bank of Korea warned that refinancing risks for short-term PF asset-backed commercial paper (PF-ABCP) and commercial paper (CP), which are the main funding sources for real estate PF, could increase, leading to wider credit spreads and higher funding costs.

In particular, securities firms and capital companies with high exposure to real estate PF should be cautious about the possibility of increased funding costs and refinancing risks associated with short-term market borrowings.

Additionally, regarding real estate PF exposure, it was emphasized that efforts to improve asset soundness internally should be combined with proactive restructuring of PF projects using PF lender agreements.

A Bank of Korea official stressed, “For real estate PFs with prominent vulnerabilities, it is necessary to support lenders in swiftly deciding on business continuation or restructuring through voluntary agreements to alleviate concerns in the real estate PF market.”