Financial Authorities Pressure Savings Banks to Sell PF Project Sites...Is It Ineffective? [1mm Financial Talk]

Difference Between Desired Selling and Buying Prices of Businesses About 20%P
Losses Expected if Sold at Market Price... Entering 'Holdout' Phase
"PF Loan Regulation Easing? It's a Call to Build Provisions"

“Are savings banks complaining that it is difficult to dispose of non-performing real estate project financing (PF) sites at 30% of the principal? What do they mean? There are hardly any places putting out properties at half price right now.” (Financial authorities official)

On the 29th, according to the financial sector, opinions differ between financial authorities and the savings bank industry regarding the restructuring of real estate PF. The financial authorities claim that savings banks are passive in disposing of non-performing sites, while savings banks argue that the market's desired purchase prices are unreasonable. There was also a clear difference in stance between the two parties regarding the recent activation plan for auction balance loans related to foreclosure and public auctions issued by the Financial Supervisory Service.

The financial authorities pointed out the minimum bid prices for foreclosure and public auctions set by savings banks. Since the minimum bid prices are close to or higher than the principal, foreclosures and public auctions are frequently delayed or canceled. A financial authority official said, “They put it out at around 105% and then say it doesn’t sell.” He added, “According to our own monitoring, the difference between the sales price desired by the savings bank industry and the price desired by market buyers is about 20 percentage points based on the principal. From the savings banks’ perspective, selling at market price would result in losses even after considering loan loss provisions, so not only small and medium-sized banks but also some large banks seem to have entered a ‘hold out’ phase.”

The savings bank industry has maintained the position that sales cannot proceed smoothly due to the large gap in market prices. Even if they offer amounts close to half the asset price, private operators demand even lower prices. Some believe it is better to extend maturities until the real estate market recovers rather than entering foreclosure and public auctions at a big loss. A senior industry official said, “Savings banks also need to endure losses, but they believe that 30% of the asset price is excessive.” Another official said, “The authorities want to quickly clear these assets, but many savings banks think they just need to wait six months or a year.”

Oh Hwa-kyung, Chairman of the Korea Federation of Savings Banks, also mentioned the price gap at the savings bank industry performance briefing held on the 21st of last month. He said, “We lent 100 won on collateral valued at 130 won and set aside provisions to reduce the book value to 70 won,” adding, “Selling at 70 won means disposing at nearly 50%, but many in the market are waiting to buy at around 40 to 50 won.” He further stated, “We do not consider this price appropriate.”

The difference in opinions between financial authorities and savings banks was also evident in the ‘Non-Action Opinion Letter on Auction Balance Loans’ recently issued by the Financial Supervisory Service to activate foreclosure and public auctions of non-performing PF. Auction balance loans refer to loans borrowed by successful bidders in foreclosure and public auctions using real estate as collateral from banks or savings banks. When savings banks dispose of land at the bridge loan stage through foreclosure and public auctions and provide auction balance loans to the successful bidders, these loans will not be considered violations of PF loan limits. This relaxes the regulation that only up to 20% of total credit exposure can be allocated to PF loans. However, the successful bidder must finance at least 10% of the bid price with their own capital. A Korea Federation of Savings Banks official said, “We view this positively as a regulatory relaxation.”

However, financial authorities maintain that “strictly speaking, this is not a regulatory relaxation.” This is because loan loss provisions for auction balance loans must be treated similarly to PF loans. A Financial Supervisory Service official explained, “This non-action opinion letter is part of efforts to urge the savings bank industry to clean up non-performing loans as part of the foreclosure and public auction activation plan,” adding, “It means conducting foreclosure and public auctions considering provisions and increasing reserves.”

He further explained, “If the land collateral loan previously executed by a savings bank was 100, after foreclosure and public auction, this 100 disappears and a new loan of up to 90 can be extended to a new developer. Since the new loan is a PF loan, provisions must be accumulated according to the PF loan provisioning rate.” According to the current Financial Supervisory Service regulations for mutual savings banks, for general corporate loans including land collateral loans, 20% of the asset value must be set aside as provisions for substandard loans, and 50% for doubtful loans. However, for PF loans, 30% must be set aside for substandard loans and 70% for doubtful loans.