Bank of Korea: "Real Estate PF Risks Gradually Easing, Local Construction Firms Must Manage Liquidity"

BOK Expects Gradual Easing of Real Estate PF Concerns
Increase in Non-Performing Loans Below Fixed Rate and Liquidity of Local Construction Firms Require Management

Although the risk of real estate project financing (PF) is gradually easing due to the government's restructuring efforts, an analysis has pointed out that issues such as non-performing loans and liquidity shortages among some local construction companies still require careful attention.

According to the Bank of Korea's Financial Stability Report on the 26th, as of the end of the second quarter of this year, the outstanding loans for real estate PF in the financial sector amounted to 132.1 trillion won, marking a decrease for the second consecutive quarter, while the delinquency rate remained at 3.56%, similar to the previous quarter.

Among these, a primary business feasibility reassessment was conducted on projects with a high likelihood of default (worth 33.7 trillion won), and about 60% of the evaluated projects were classified as either concerning or at risk of default. However, considering that most of the low-feasibility projects were included in the first assessment, the report predicts that the number of defaults is unlikely to increase significantly during future evaluations.

Looking at the fixed and substandard loan ratios for PF by financial sector, savings banks saw the largest increase, rising from 10.9% in 2023 to 29.7% at the end of June this year, while mutual finance institutions also rose from 5.1% to 19.7%. The Bank of Korea expects that as financial companies implement plans to resolve non-performing loans through measures such as light auctions, write-offs, and restructuring, the fixed and substandard loan ratios will gradually decline.

The report assessed that, compared to past savings bank crises, although the scale of PF non-performing loans has increased, the delinquency rate remains low and loss absorption capacity has improved, so the impact of PF defaults on financial system stability will be limited.

Following the PF business feasibility reassessment, the amount of related fixed and substandard loans reached 24.3 trillion won, significantly higher than the 10.5 trillion won during the 2011 savings bank crisis. However, the delinquency rate in non-bank sectors ranges from 0.5% to 8.4%, which is lower than the 29.1% rate for savings banks during that crisis, and capital ratios have also increased substantially, indicating that financial institutions are sufficiently capable of absorbing PF defaults. The report also emphasized that proactive measures such as additional PF-related provisions and capital increases have contributed to limiting negative impacts on the financial system.

A Bank of Korea official stated, "Thanks to the supervisory authorities' restructuring efforts and the financial sector's liquidity securing measures, the risk of real estate PF is expected to gradually ease," but also stressed, "Attention must be paid to residual risks such as potential liquidity shortages among some local construction companies."