[Geuman Report] Non-bank Sector's Non-performing Loan Growth Rate Three Times That of Banks

Bank of Korea Releases Financial Stability Report
Non-bank Non-performing Loans Increase by 73.4%
Overseas Real Estate Investment Concentrated in Commercial Properties

The increase rate of non-performing loans (NPLs) in domestic non-bank financial institutions was found to be three times that of banks. There is a phenomenon in the NPL market where specialized investment companies prefer bank-secured non-performing loans, raising concerns that this could act as a constraint on the sale of non-bank NPLs.

According to the Financial Stability Report released by the Bank of Korea on the 28th, as of the end of last year, financial institutions' non-performing loans amounted to 43.7 trillion KRW, showing an increase in both banks and non-banks compared to the end of the previous year. Bank NPLs increased by 23.8%, from 10.1 trillion KRW at the end of 2022 to 12.5 trillion KRW at the end of 2023, while non-bank NPLs rose by 73.4%, from 18 trillion KRW to 31.2 trillion KRW during the same period.

In the case of non-banks, the increase was centered on mutual finance institutions. Mutual finance accounted for the largest share at 17.3 trillion KRW (55.5%), followed by savings banks at 8 trillion KRW (25.6%) and credit finance companies at 5.9 trillion KRW (18.9%).

Accordingly, financial institutions expanded the scale of NPL sales and write-offs from 13.4 trillion KRW in 2022 to 24.3 trillion KRW in 2023 to improve asset soundness. Last year, the scale of NPL sales and write-offs was 9.1 trillion KRW for banks and 15.2 trillion KRW for non-banks, increasing by 93.6% and 74.4% respectively compared to the previous year. Mutual finance institutions and savings banks also saw a significant increase in new NPLs last year, leading to larger sales and write-offs.

However, while banks were active not only in write-offs but also in sales through the NPL market, the situation is not as easy for non-banks. The reason is that NPL specialized investment companies prefer senior secured loan claims from banks. This is likely to act as a constraint on the sale of non-bank NPLs.

According to the Bank of Korea, last year, NPL specialized investment companies purchased 5.2 trillion KRW mainly in bank-secured non-performing loans, and as a result, the leverage ratio increased from 2.52 times at the end of 2022 to 3.44 times at the end of September 2023. The Bank of Korea added, "The increase in the leverage ratio of NPL specialized investment companies is evaluated to have reduced their capacity to invest in other non-bank NPLs."

Sales have the advantage of disposing of non-performing loans at appropriate market prices through market mechanisms, which has a greater effect on improving asset soundness than write-offs. The Bank of Korea suggested, "It is necessary to explore ways to alleviate the preference of specialized investment companies for bank loans in the NPL market so that the soundness of the financial system, including non-banks, can be maintained even in situations where credit risk has increased."

Non-bank Overseas Real Estate Investment 46 Trillion KRW... 92% Concentrated in Commercial Properties

In the case of domestic non-banks, attention is also needed for risk management related to overseas real estate investments. According to the report, the total overseas real estate investment by non-bank financial institutions was approximately 46.3 trillion KRW as of the end of September 2023, of which about 92% (42.7 trillion KRW) was commercial real estate.

Overall, investments were concentrated in North America and Europe. Insurance companies and mutual finance institutions focused their investments in North America (67% and 77%, respectively). Meanwhile, securities companies and credit finance companies had relatively high investment proportions in Europe (38% and 32%, respectively).

The ratio of commercial real estate investment in North America and Europe to assets is about 1.2% on average. The Bank of Korea judged that even if investment losses expand, the possibility of transmission to systemic risk is low.

However, the Bank of Korea pointed out, "It is necessary to pay attention to risk management from the perspective that losses could expand further if domestic real estate project financing (PF) defaults increase simultaneously or if the recovery of the global commercial real estate market is significantly delayed due to the establishment of remote work after COVID-19."