Article 21 Trillion 'Poor PF' Cleanup Begins in Earnest... Additional Management Needed for Fund 'Parking Transactions'

NICE Credit Rating "Orderly Resolution of Non-Performing Loans Underway... Still Too Early to Be Optimistic" Assessment
Loss Scale of Securities, Capital, and Savings Bank PF Expected to Be Between "Optimistic and Neutral Scenarios"

Financial authorities have completed the first phase of feasibility assessments for real estate project financing (PF) and plan to accelerate restructuring and liquidation of projects classified as cautionary or at risk of default according to post-management plans prepared by financial companies. However, there is an analysis that it is still premature to be optimistic about a smooth landing of the PF market, as normalization could be delayed if there are many sales intended merely to buy time.

On the 30th, NICE Credit Rating issued a report titled "Mid-term Review of Financial Companies' Performance Following Strengthened Real Estate PF Feasibility Assessment Standards," stating, "Orderly resolution of non-performing assets is underway, but it is still too early to be optimistic," and emphasized that "additional management going forward is crucial."

It pointed out that projects classified as cautionary or at risk of default should promptly pursue restructuring, sales, or write-offs to minimize additional losses such as interest expenses. In particular, it analyzed that projects with delayed progress in restructuring should be encouraged to sell or write off through additional soundness reclassification to prevent long-term fixation.

NICE Credit Rating stated, "If there are many sales intended merely to buy time, as seen in recent controversies over 'parking transactions' related to savings bank restructuring funds, the normalization of real estate PF will be further delayed, and the need for additional reserve provisions will increase, requiring meticulous management."

Regarding the scale of PF-related losses in the secondary financial sector, including securities, capital companies, and savings banks where real estate PF defaults have accumulated, it is expected to be between optimistic and neutral scenarios.

NICE Credit Rating assessed, "Losses may further expand mainly in mezzanine and subordinate tranches during the upcoming auction and public sale processes," but judged that "overall, orderly resolution of non-performing assets is progressing based on the decline in market interest rates and financial authorities' guidelines."

It evaluated the first half performance of the secondary financial sector as limited compared to early-year concerns. Although some securities firms and capital companies that aggressively handled real estate PF recorded losses, these are considered manageable.

However, considering the significant performance differentiation according to each financial company's real estate PF investment tendencies and the resulting credit rating downgrades, additional downward pressure is expected in the second half of the year.

NICE Credit Rating explained, "Although the overall deficit scale of savings banks has expanded, the capital adequacy ratio based on the Bank for International Settlements (BIS) standards has rather increased, so it is not a level of concern," but added, "If the proportion of mezzanine and subordinate real estate PF is large, additional provisions for loan losses and reserves will likely be necessary."

It further added, "Financial companies that have revealed many potential non-performing assets during the process of promoting a smooth landing of real estate PF may face credit rating downgrades in the second half of 2024."

Meanwhile, according to the "Results of Financial Companies' Feasibility Assessments on Real Estate PF and Future Plans" announced by financial authorities on the 29th, out of the total real estate PF exposure of 216.5 trillion KRW across the entire financial sector, the first-phase assessment target exposure is 33.7 trillion KRW. Among these, cautionary (7.4 trillion KRW) and at-risk (13.5 trillion KRW) projects amount to 21.0 trillion KRW, accounting for 9.7% of the total PF exposure.

Limiting the scope to three sectors?securities, savings banks, and specialized credit finance companies?the total real estate PF exposure (risk exposure amount) is 70.6 trillion KRW, with the first-phase assessment target exposure at 15.8 trillion KRW. Among these, cautionary (3.4 trillion KRW) and at-risk (6.5 trillion KRW) grades total 10.1 trillion KRW, representing 14.3% of the total real estate PF exposure. By sector, the scale of cautionary and at-risk projects is 3.2 trillion KRW for securities, 4.5 trillion KRW for savings banks, and 2.4 trillion KRW for specialized credit finance companies.