[PF Soft Landing] "5-10% of Projects Are Poor Quality... Fully Manageable"

"Provision Reserves Exceed 100 Trillion Won, Additional Accumulation Minimal"

The financial authorities revealed that project financing (PF) sites requiring restructuring or liquidation due to low viability account for about 5-10% of the total. They emphasized that this is a level that the financial and construction industries can sufficiently bear, and that the remaining sites can proceed with their projects normally. The effects of improved PF site evaluations on auctions and forced sales are expected to become evident from the second half of this year.

The following is a Q&A with Kwon Dae-young, Secretary General of the Financial Services Commission, and Park Sang-won, Deputy Director of the Financial Supervisory Service.

- What is the approximate ratio of normal to distressed PF sites?

▲ We have conducted simulations in various ways, and we believe that roughly 90-95% can be considered normal sites. As I have mentioned several times, the majority of sites still have a strong character of normal operations. Once the main PF is underway, stakeholders have an interest in completing the project. However, bridge loans or land-secured loans involve only land ownership, requiring approval, and if the project is viable, it moves to the main PF stage, at which point we inject public guarantees. If it does not reach that level, such as failing to acquire 100% of the land purchase, not obtaining approval, or having legal disputes, then we recommend selling the property.

- Is there a concern that the incentives might conflict with financial soundness regulatory principles and create a bad precedent?

▲ You mentioned that incentives might conflict with existing policies, and there is some truth to that. However, since this is done very temporarily and restrictively only in relation to restructuring or clearing distressed projects, the overall impact on soundness is minimal. We are considering this temporarily and restrictively for about six months to a year, without undermining soundness principles or global standards. This is not a recurring measure and applies only to projects with poor viability, so the scale is expected to be smaller than anticipated.

- There could be controversy over government intervention in new capital injections, and concerns that distress could spread to financial companies.

▲ Since the second half of 2022, we have handled this issue consistently with principles. There is no political consideration whatsoever. A soft landing is necessary, and if greed turns into fear and panic selling occurs, it becomes unmanageable. We calmed the fears that arose during the Legoland incident through efforts, so such a process is unnecessary now. If restructuring had started then, destructive restructuring would have occurred. Although it is now delayed, we see a path forward and believe good results will come.

Financial companies are making sufficient profits, but this issue involves the construction and financial industries as the main stakeholders, so it is appropriate for them to resolve it responsibly in principle. Financial companies have more capacity than construction companies. Bank profits exceed 20 trillion won, and insurance companies have about 6 to 7 trillion won. The scale is not that large, so it is bearable, but it is not about forcing them to buy distressed assets unconditionally. If there are no legal disputes and the process is clean, and the financial companies judge that it is acceptable?of course, after internal board approval?they will proceed reasonably. It is not about forcibly taking over completely distressed assets.

- If the Financial Supervisory Service ultimately guides project viability evaluations, does that mean the authorities have direct authority to 'separate the wheat from the chaff'? What are your thoughts on this controversy?

▲ The appropriateness of evaluation grades will be checked by the FSS inspection department, and decisions will likely be made at a reasonable level after sufficient debate between inspectors and the financial companies involved. The classification of soundness and the provisioning according to the grades are checked through final inspections or follow-up inspections.

- What is the basis for expanding the syndicated loan to 5 trillion won?

▲ When making market stabilization efforts, we act boldly and sufficiently. The maximum range of about 5 trillion won was set as the level the market would feel is adequate. For now, it is that amount, but if done in June, it will likely come out in the third or fourth quarter. Considering the current financial sector, we will start with about 1 trillion won, and since the entire amount is through capital calls, we will share the burden jointly when assets come up for sale. We have set the range between 1 trillion and 5 trillion won, but ideally, it would be best to achieve a soft landing without spending the money. So far, only 30-40% of the 94 trillion won has been executed. It is not about spending all the money but leaving it as a large breakwater if project viability and the market improve.

Kwon Dae-young, Secretary General of the Financial Services Commission, is announcing the future policy direction for an orderly soft landing of real estate PF at the Government Seoul Office in Jongno-gu, Seoul on the 13th. Photo by Jo Yong-jun jun21@

- How much will the provisioning for the secondary financial sector increase?

▲ The amount classified as doubtful for recovery and the scale of potential distress are not as large as expected. For the distressed portion, companies estimate values, and savings banks have sufficient provisioning to cover doubtful recoveries above fixed levels. At the end of last year, provisioning for the secondary financial sector was strengthened. Overall, the burden of provisioning due to this project viability evaluation is not very large. Savings banks are expected to have difficulty making net profits this year, but since their capital ratios are significantly high, it is not a major problem.

- Is it true that 5-10% of PF sites are distressed?

▲ That can be considered accurate. Forced sales and auctions are expected to account for 2-3%. Financial companies will know after trying, but I have repeatedly said it is not as many as expected. It may vary depending on economic conditions, but at this point, that is the case. Savings banks have been very worried over the past two years, but the FSS has made significant efforts regarding soundness and liquidity. There seems to be no major problem, and stress tests and project viability evaluation criteria are considered bearable. Savings banks themselves will raise 200 billion won, then KAMCO will soon inject 200 billion won, and if syndicated loans cover a significant portion of savings bank collateral, this part can be covered. During the 2022 crisis, high-interest products were switched to low-interest ones at the end of last year. After that period, profits from net interest margins will emerge. Savings banks are not facing illegal issues like the large-scale special incident in 2012. Therefore, they can overcome this by making money.

- How much additional provisioning must be accumulated due to improved project viability evaluations?

▲ It is difficult to give an exact figure. The total provisioning in the financial sector is about 100 trillion won. You can consider the impact very minimal.

- The Korea Land and Housing Corporation (LH) land purchases are sluggish. With the real estate market rising, is the gap between the rich and poor widening?

▲ If distressed or difficult projects are not cleared now, it could rather shrink housing supply and demand in 2-3 years. If land prices are high but project viability is low, sharing losses and selling at a loss?selling 100 won land for 50 won?allows a new buyer to purchase at 50 won and supply housing based on that land price. But if the land is just held, it becomes 'zombie land.' Rather than that, from a national housing perspective, looking 2-3 years ahead, projects with poor viability need restructuring, which itself may help resolve housing supply issues that are currently a concern in 2-3 years.

- From the developer's perspective, is it not that financially capable companies buy cheaply and secure profitability?

▲ That is a market principle, and it seems natural that buyers with purchasing power acquire assets. Surplus funds should be used to inject capital into projects for restructuring. I am not sure what the market price is, but it is determined by the market, and the price at the moment of transaction becomes the market price. We should accept the effects accordingly and it is difficult to evaluate further.

- Regarding improved project viability evaluations, is arbitrary evaluation by financial companies still possible?

▲ Land purchases involve stages such as approval and completion. As we said, we will check the situation and consider the appropriateness of post-evaluation, including any irregularities.

- There may be issues of buying land cheaply and selling it at a high price.

▲ The fact that prices are low or high reflects market transactions. If a project fails due to poor viability, and there are auction or forced sale procedures, the price sold is the market price. Subjectively, some may think they bought cheaply if they profit by managing the project well or subleasing, but the price decided with available information is simply the market price. If sales do not proceed or adjustments are needed, land prices may rise again. However, it is better for someone to manage the project than for it to be abandoned. The Ministry of Land, Infrastructure and Transport and financial authorities agree on this. Rather than leaving a project as is, adjustments are made by easing tax or loan regulations. Since financial companies have capacity, they have incentives to hold assets, but they should sell some and clear them. Clearing does not necessarily mean provisioning; financial companies will decide. They may sell or hold.

- Will PF land be supplied cheaply as the authorities expected?

▲ PF projects are individual, so if average prices adjust downward, PF sites consist of land prices and construction costs. Financial costs also vary with interest rates, and land price adjustments will affect overall price adjustments. Prices may decline or supply may not occur, but since demand involves various factors, it is difficult to officially comment on real estate price levels.

- What criteria must projects with low viability meet to receive funding through syndicated loans?

▲ To be clear, they must be at market price and free of legal issues. Banks and insurance companies participating in syndicated loans will evaluate project viability.

Kwon Dae-young, Secretary General of the Financial Services Commission, is announcing the future policy direction for an orderly soft landing of real estate PF at the Government Seoul Office in Jongno-gu, Seoul on the 13th. Photo by Jo Yong-jun jun21@