[Geuman Report] "Small and Medium Securities Firms Face Liquidity Risk Due to Real Estate PF Loans"

Bank of Korea Financial Stability Report
Securities Firms' Real Estate PF Loan Delinquency Rate at 17.6%
Rapid Deterioration of Soundness in Small and Medium Securities Firms

The delinquency rate on real estate project financing (PF) loans managed by securities firms was found to be the highest compared to other industries. There is an analysis that soundness should be strengthened, especially among small and medium-sized securities firms.

According to the "June Financial Stability Report" released by the Bank of Korea on the 26th, the delinquency rate on real estate PF loans by securities firms at the end of the first quarter of this year was 17.6%, higher than other industries such as savings banks (11.3%) and credit specialized companies (5.3%). At the end of the first quarter of this year, the outstanding balance of real estate PF loans by financial companies totaled KRW 134.2 trillion, showing a slowdown in growth since last year. However, the delinquency rate continued to rise to 3.55% since 2021.

The soundness of securities firms' PF debt guarantees is also deteriorating. The guarantee amount by securities firms for PF securitized bonds was KRW 18.2 trillion at the end of the first quarter of this year, and the trust account balance exposed to real estate PF by real estate trust companies was KRW 5.4 trillion. The ratios of loans requiring attention and non-performing loans, which indicate signs of insolvency, rose sharply to 17.8% and 3.6%, respectively, indicating a decline in soundness.

Concerns were also raised that the contingent liabilities of real estate trust companies could materialize through responsibility completion management-type (Chaekjun-hyeong) land trusts. Chaekjun-hyeong land trusts require real estate trust companies to bear the responsibility for completion if low-credit small and medium-sized construction companies fail to meet the completion deadline. If completion is not finished within the deadline, liability for damages to the lending consortium arises, potentially materializing the contingent liabilities of real estate trust companies.

Possibility of Increased Real Estate PF Risks Due to Construction Companies' Profit Decline

The possibility of increased risks related to real estate PF due to construction companies' profit decline was also raised. Comparing 2022 and 2023, the interest coverage ratio of construction companies (based on the average of listed companies by year) worsened from 4.7% to 1.2%, the current ratio from 135.5% to 130.8%, and the debt ratio from 151.2% to 166%. During the same period, the proportion of highly indebted companies increased from 28.4% to 31.3%, and liquidity concern companies rose from 11.6% to 18.1%.

Recently, with the contraction of new orders and permits becoming more pronounced, the profitability decline of construction companies is expected to continue for the time being. The Bank of Korea analyzed that if real estate PF projects do not proceed smoothly under these circumstances, not only will contingent liabilities materialize, but liquidity is likely to deteriorate, especially among small and medium-sized and regional construction companies.

A Bank of Korea official said, "Although the exposure amount related to real estate PF remains large at around KRW 230 trillion, the prolonged downturn in the real estate market and rising construction costs have lowered the profitability of PF projects, somewhat increasing the risk of insolvency. However, considering that financial institutions' loss absorption capacity has been enhanced through increased provisioning and capital expansion, the possibility of this expanding into a systemic risk is judged to be low."

He added, "The recent real estate PF soft-landing measures announced by financial supervisory authorities are also expected to alleviate uncertainties and risks in the PF-related market. However, since delinquency rates are rapidly rising in some non-bank sectors, active risk management through measures such as sale and auction of non-performing assets will be necessary."