The credit ratings of mutual savings banks, capital companies, and specialized non-performing loan (NPL) firms in the secondary financial sector are showing a hyperbolic divergence due to the deterioration of real estate project financing (PF). While the secondary financial sector is unable to avoid credit rating downgrades amid expanding PF-related risks, NPL firms, which 'thrive on crises,' are receiving upward evaluations as they expand their assets.
According to the financial sector on the 31st, among the top 10 domestic savings banks, four?OK, Accuon, Pepper, and Daol?have seen their credit ratings downgraded this year by the three major domestic credit rating agencies (NICE Credit Rating, Korea Ratings, and Korea Investors Service).
Korea Investors Service recently downgraded the credit rating of OK Savings Bank, the industry's second largest, from BBB+/Negative to BBB/Stable. NICE Credit Rating also downgraded Pepper Savings Bank's credit rating last month from BBB/Negative to BBB-/Negative, and lowered the credit ratings of Accuon and Daol Savings Banks from BBB+/Stable and BBB/Stable to BBB+/Negative and BBB/Negative, respectively.
Savings banks affiliated with banking financial holding companies or large financial firms were no exception. On the 25th of last month, NICE Credit Rating downgraded the long-term credit ratings of KB Savings Bank and Daishin Savings Bank from A/Stable and A-/Stable to A/Negative and A-/Negative, respectively. In the capital industry, the credit rating of the mid-sized capital company M Capital was downgraded by all three agencies.
The decline in credit ratings of major savings banks and capital companies is due to the deteriorating business environment. The worsening credit quality amid economic downturn, especially real estate PF, which many entered during the boom period, is identified as a constraining factor for each company. For example, as of the end of March, OK Savings Bank's real estate PF-related loans amounted to 2.0353 trillion KRW, accounting for 17.3% of total loans and 134.7% of equity capital. Among the total real estate PF loans, main PF loans were 949.8 billion KRW, and bridge loans reached 1.0855 trillion KRW, showing a relatively high proportion of the riskier bridge loans.
NICE Credit Rating stated, "The large exposure to real estate PF and its inferior quality are burdens on financial soundness," adding, "Bridge loans are likely to experience prolonged project delays due to the downturn in the real estate market and are unlikely to benefit from policy support. Main PF loans mostly involve small to medium-sized construction companies, and about 40% are for officetels and neighborhood living facilities, resulting in high completion and sales risks."
On the other hand, NPL firms are seeing a bright outlook due to the increase in non-performing loans in the market and the full-scale restructuring of PF. Hana Financial Group's subsidiary Hana F&I had its credit rating upgraded by all three rating agencies from A/Stable to A/Positive from late last year to early this year. This was driven by the expansion of the NPL market, a 149.6 billion KRW capital increase at the end of last year, and maintaining the second position following United Asset Management (UAMCO).
As an industry that thrives on crises, the recent growth of the NPL sector has been steep. According to the financial sector, the amount of NPL sales through competitive bidding by banks last year was about 5.5 trillion KRW, a 126% increase compared to 2.5 trillion KRW in 2022. In the first quarter of this year, NPL sales reached 1.7 trillion KRW, more than double the previous year. The total annual scale is expected to reach 8 to 10 trillion KRW this year. Especially, with the full-scale restructuring of real estate PF this year, related assets are expected to flood the market.
Each company is raising 'ammunition' to respond to the growing market. Woori Financial F&I recently conducted a capital increase of 120 billion KRW to respond to the expanding NPL market, and UAMCO, Hana F&I, and Daishin F&I have also issued corporate bonds. A financial sector official said, "The NPL market size is expected to expand further this year compared to last year. However, since the real estate market is still in a recession and high interest rates continue, recovery rates and resulting profitability may be limited."
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