[Big Market, Non-Performing Loans] ① Second Half NPL Volume Floods... Market Size Approaches 8 Trillion Won

Last Year 4.7 Trillion KRW → Expected Growth to 8 Trillion KRW This Year
High Interest Rates and Economic Downturn Make Loan Repayment Difficult
Increase in NPL Volume Due to PF Restructuring

"This year, the scale of non-performing loan (NPL) sales from the banking sector is expected to reach 8 trillion won annually. A significant opportunity has opened up in the NPL market since the savings bank crisis."

A president of a major domestic securities firm, recently met, forecasted the NPL market this year in this way and said they would seek new business opportunities in the rapidly growing NPL market. They intend to proactively enter this market by anticipating signs that the NPL market will expand in the second half of the year due to the financial authorities' restructuring of real estate project financing (PF). Industry insiders predict that if 5-10% of domestic real estate PF projects (230 trillion won) become subjects of restructuring, up to 23 trillion won worth of PF-related assets could flood the NPL market in the second half of the year.

According to the Bank of Korea on the 10th, the size of NPLs in the financial sector stood at 43.7 trillion won at the end of last year, a 55% increase from 28.1 trillion won the previous year. NPLs generally refer to loan claims overdue by more than three months. In particular, the volume of NPL sales from domestic banks, the main suppliers of NPLs in Korea, is expected to increase from 4.7 trillion won last year to 8 trillion won this year. Due to the ongoing economic downturn and high interest rates, there is a high possibility that real estate provided as collateral by companies unable to repay principal and interest will be released into the market in large quantities. In fact, the 3-year government bond yield in the Seoul bond market was in the low 3% range as of the 3rd. The 3-year government bond yield in 2021 was in the low 1% range. The rise in Korean government bond yields leads to an increase in bank bond yields, resulting in higher market interest rates for loans and other financial products. If this high-interest-rate environment persists for a long time, the amount of interest to be paid increases, which is likely to lead to defaults. In fact, the scale of NPLs sold by domestic banks in the first quarter of this year reached 678.4 billion won, nearly double the 369.4 billion won recorded in the first quarter of last year.

Moreover, while a significant portion of the increase in NPLs comes from personal rehabilitation claims or credit recovery claims due to individual bankruptcies, the explosive growth in NPL volumes currently is largely due to the stagnation in the real estate PF market. Projects that have not started construction and have been surviving only by paying interest on bridge loans are now facing restructuring pressure from financial authorities, causing existing major creditors to realize some losses. Land deemed unfeasible is inevitably being put up for public auction. Projects with relatively good feasibility will try to extend maturities and hold on, but as financial authorities urge financial institutions to cut losses, a substantial amount of PF-related assets is expected to flood the market.

The NPL Market Will Be More Active Next Year... Investment Strategies Must Be Well Planned

According to the 'Future Policy Directions for the Orderly Soft Landing of Real Estate PF' announced by financial authorities, the securities industry must evaluate the feasibility of real estate PF projects by early July and select PF projects with high risk of default for restructuring. Authorities estimate that about 5-10% of domestic real estate PF projects will be subject to restructuring. Considering the size of domestic PF projects is 230 trillion won, this means that up to 23 trillion won worth of PF-related restructuring assets could be released into the market.

The securities industry interprets the financial authorities' strengthening of reserve fund management as a signal to quickly sell NPLs. A PF division official from Securities Firm A hinted, "The standards for building reserves for securities firms are being tightened, and reserve accumulation can be read as an internal recognition of losses and a signal to quickly sell NPLs."

With a volume surge expected in the NPL market in the second half of the year, the securities industry views this as an opportune time for NPL investment. NPL investment is often described as a market that grows by feeding on recessions. When supply increases, prices fall. Buying assets cheaply and selling them at market value when conditions improve can generate profits.

A representative from Securities Firm B said, "In the second half of this year, price adjustments of real assets due to inflation, elevated interest rates, and economic recession, as well as the interest burden on households and companies, will increase the likelihood that performing loans held by various financial institutions will become NPLs, ultimately leading to an increase in market sales volume. In the real estate finance market, including PF loans, bridge loans or deals with poor feasibility are expected to appear as NPLs in the market." However, the representative also noted, "Since the government is monitoring asset soundness in the financial sector, including real estate PF, and has announced various measures for a soft landing, the volume of NPLs may not increase as much as the market expects."

There is also an opinion that the NPL market will be more active next year than in the second half of this year. Another securities firm official said, "If risks such as the domestic real estate market downturn are resolved and capital is secured along with strategic investments, the NPL market next year could appear as an attractive market drawing interest from various investors compared to this year. However, especially at such times, the consistency and execution of investment strategies by investment firms will determine the success or failure of investments."