NPL Investment Firms' Asset Size Grows and Profitability Remains Strong
Kiwoom and Woori Enter Market... 5 Firms Active
Regulators' Pressure on Bank Soundness Management Increases... Potential Additional Inflow of Non-performing Real Estate PF
Bank Sector Delinquency Rate Expected to Continue Rising Until Year-End
As financial authorities continue to pressure the financial sector to manage soundness and the inflow of non-performing loans (NPLs) from real estate financing persists, the NPL market is expected to continue growing through next year. Analysis indicates that NPLs are increasing mainly among vulnerable borrowers, and there is a high possibility that additional distressed real estate project financing (PF) and bridge loans will enter the market.
On the 21st, NICE Credit Rating released a report titled "How Long Will the Boom Amid the Recession in NPL Investors Last?" stating that due to pressures on banks to manage soundness, additional inflows of underperforming real estate PF, and rising delinquency rates in the banking sector, the NPL market size is expected to continue expanding until 2025.
The NPL market has been expanding since last year as the sale of bank NPLs increased due to the economic slowdown. In 2020, the recognition of NPLs was deferred due to the government's financial support policies amid COVID-19, but from the second half of 2023, the volume of bank NPL sales began to expand significantly.
As a result, the asset size of NPL investors has grown, and profitability remains at a favorable level. Since 2020, Kiwoom F&I and Woori Financial F&I have entered the market, joining existing major players such as Union Asset Management, Daishin F&I, and Hana F&I, making five key companies active in the market. These operators recorded a return on assets (ROA) generally exceeding 1.0% in 2023 and the first half of 2024.
NICE Credit Rating highlighted the ongoing pressure on banks to manage soundness as a key reason for the continued growth of the NPL market through next year. Recently, domestic banks have been managing soundness indicators by setting aside loan loss provisions and selling or transferring NPLs in response to financial authorities' demands. Although the scale of sales and transfers has increased since the second half of last year, the balance of NPLs rose as of the end of June this year, raising the need for continuous asset soundness management. The NPL balance increased from 12.5 trillion KRW at the end of last year to 14.4 trillion KRW at the end of June this year.
Lee Eun-mi, Senior Researcher at the Financial Evaluation Division, forecasted, "At the current interest rate level, loan defaults among vulnerable borrowers continue, and the scale of NPL sales is expected to remain high for the time being."
The possibility of additional inflows of distressed real estate financing NPLs was also identified as another factor driving NPL market growth. The balance of real estate financing in the financial sector showed no significant reduction, moving from 131.6 trillion KRW at the end of March last year to 132.1 trillion KRW at the end of June this year. The delinquency rate also rose to 3.56% as of the end of June this year (main PF 2.50%, bridge loans 11.08%) from 2.01% at the end of March last year (main PF 0.67%, bridge loans 11.33%).
Lee explained, "Financial authorities concretized a soft-landing plan for real estate PF in the first half of this year and selected PFs subject to auction or foreclosure through business feasibility evaluations," adding, "They plan to supply liquidity to financial companies, including specialized NPL investors participating in the normalization process by mobilizing syndicated loans."
She also predicted that the delinquency rate in the banking sector will continue to rise until the end of this year. Due to the characteristics of the Korean financial market, where variable-rate loans account for a high proportion of household loans, delinquency rates are expected to increase for the time being before a trend of interest rate cuts and economic recovery.
Lee noted, "While there is growing expectation that the U.S. will begin cutting policy rates in earnest, Korea has relatively limited room for rate cuts," adding, "Even if the base rate cut begins, Korea is expected to have fewer cuts and smaller reductions compared to the U.S." She concluded, "Bank delinquency rates will continue to rise until the end of this year, and considering the lagging nature of NPL disposal, the growth of the NPL market will persist through next year."
Meanwhile, despite the overall economic downturn, the surge in NPL volumes in the market is expected to result in a positive medium- to short-term business outlook for NPL investors. The expansion of NPL sales during the recession phase is anticipated to enhance the business base and profitability of NPL investors.
Lee said, "When the real estate market shifts to a boom phase, the recovery of existing investment assets will be accelerated, enabling profit realization, which is positive," but she cautioned, "However, as the number of market participants has increased to five, if the economy recovers and the NPL market size shrinks again in the long term, competition intensity may increase compared to before, potentially reducing profitability."
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