[Q&A] Bank of Korea: "Concerns about Real Estate PF Exist, but Manageable Level"

Bank of Korea March 2024 Financial Stability Report

The Bank of Korea evaluated the overall financial stability situation as stable despite risks such as household credit and real estate project financing (PF) defaults. Although the delinquency rate of real estate PF in the secondary financial sector is rising, it stated that the level is sufficiently manageable.

At a press briefing on the 'Financial Stability Situation Report' on the 28th, Lee Jong-ryeol, Deputy Governor of the Bank of Korea, assessed that although there are risks such as the potential expansion of real estate PF defaults and the increasing debt repayment burden on households and companies, the domestic financial system is generally maintaining a stable condition.

Jang Jeong-su, Director of the Financial Stability Bureau, explained the reason why the loan balance has not decreased despite two years since the real estate PF problem occurred: "Even though PF restructuring is underway, there are still projects with ongoing funding demand."

Regarding the possibility of restructuring crises among construction companies, he evaluated that the construction industry is becoming polarized due to the recent prolonged high interest rates, high costs, and delayed real estate market recovery.

Below is a Q&A with Deputy Governor Lee Jong-ryeol and Director Jang Jeong-su of the Financial Stability Bureau.

- The household credit to GDP ratio has dropped to 100.6%. Is it possible for it to fall below 100 in the first quarter?

▲(Deputy Governor Lee) I cannot say definitively. The ratio is gradually decreasing. The growth rate of household debt is slowing down. Since GDP growth is contracting, I think it might improve. When assessing financial stability, we generally evaluate it as stable. However, real estate PF is a partially concerning area, so we are monitoring it separately.

- It is unclear whether real estate PF is risky or stable. What is your overall assessment?

▲(Deputy Governor Lee) Although the delinquency rate in the secondary financial sector related to PF is rising, it is considered sufficiently manageable. The PF delinquency rate is 2.7%, which is low compared to past crises. Also, financial institutions have sufficient liquidity and crisis absorption capacity. The government is responding with various policy measures. The report includes stress test results including construction companies. Even assuming a significant expansion of PF defaults, the overall financial sector can bear it. However, since the development of PF is uncertain, it is necessary to manage it with caution.

- When forming the creditor group last year, maturity was extended assuming an interest rate cut. Was the PF scenario based on an interest rate cut? If PF defaults worsen, could there be liquidity shortages in the short-term financial market like the Legoland case?

▲(Deputy Governor Lee) Rather than assuming a delayed interest rate cut, it reflects that businesses are struggling under high interest rates.

▲(Director Jang) The PF scenario analyzed the risks of individual projects. Seven factors were used to assess risk, such as project progress, delays, high costs, and start time, compared to before. The ongoing difficulties of individual projects due to prolonged high interest rates and costs were inevitable. We evaluated whether the financial sector can bear this. Although the test did not include a liquidity crisis like the Legoland incident, capital and liquidity ratios significantly exceed regulatory levels, so we judge it is sufficiently manageable.

- It has been two years since the PF loan problem occurred, but the loan balance has not decreased. You mentioned restructuring is underway; why is the loan balance not decreasing?

▲(Director Jang) The PF loan balance is stagnant at 135 trillion won. It is not decreasing because there are still projects with funding demand while conducting PF projects.

- Why is Saemaeul Geumgo not included in the mutual finance sector in the PF analysis report?

▲(Im Gwang-gyu, Head of Stability General Team) The stress test was conducted based on micro-level data related to real estate PF. The analysis was based on connected construction companies. The micro data itself does not clearly include Saemaeul Geumgo. The analysis was based on raw data obtained from the Financial Supervisory Service. The delinquency situation of Saemaeul Geumgo is being monitored jointly with financial authorities.

- Other mutual finance institutions are distinguished, but Saemaeul Geumgo is not included?

▲(Shin Jun-young, Head of Financial Institution Analysis Department) This report targets all financial sector PF loans announced by the Financial Supervisory Service. Saemaeul Geumgo is not included in the supervisory data. After the recent Saemaeul Geumgo incident, the government has maintained close cooperation. Recently, the Ministry of the Interior and Safety and the Financial Services Commission have collaborated to expand the supervisory scope of Saemaeul Geumgo. Close information sharing will likely be necessary in the future.

▲(Seo Pyeong-seok, Head of Financial Stability Planning Department) Currently, real estate PF statistics are analyzed based on data compiled by the Financial Supervisory Service and supervisory authorities. We are carefully examining exposures and closely monitoring related risks.

- Looking at capital ratios, banks, securities, and insurance have relatively low loan balances and delinquency rates. Conversely, savings banks, credit finance companies, and mutual finance have higher loan balances and delinquency rates. Does this mean these sectors have relatively higher risks?

▲(Director Jang) Overall, the financial sector's capital ratios and liquidity are manageable. Mutual finance has large capital exposure, but in terms of delinquency, savings banks are somewhat larger. Nevertheless, savings banks are also considered manageable in terms of capital ratios.

▲(Seo) Savings banks and credit finance companies have high absolute exposure ratios, so their capital ratios appear high. However, differences exist depending on the nature of PF, such as bridge loans and seniority. It is difficult to conclude simply from quantitative aspects; qualitative factors must also be considered.

- In corporate credit, which industries saw an increase in marginal companies?

▲(Director Jang) Based on last year's performance, it was in electrical and electronics, petrochemicals, and construction. This year, with improvements in the semiconductor industry, some sectors like electrical and electronics are expected to improve.

- The attached materials mention financial risks of listed construction companies, noting continued increases in interest coverage ratio, current ratio, and contingent liabilities. Compared to the previous financial stability situation, has the environment for construction companies to face restructuring worsened?

▲(Director Jang) Since the last financial stability situation, prolonged high interest rates, high costs, and delayed real estate market recovery have continued to cause difficulties in the construction industry. Although several indicators have worsened, the overall debt ratio in construction has decreased. Polarization is occurring within the construction sector; some companies are doing well, while others are struggling. The government is fully aware and is promoting support measures to improve the situation.