Chronic Headache Real Estate PF, Long Way to Clean Up Non-Performing Loans [Savings Banks in a Tight Spot]②

Savings Banks with PF Loans Suffer Average 33% Loss
Passive in Resolving Bad Debts to Recover Investments
Interest Rate Cuts Also Delay Disposal of Non-Performing Assets

The savings bank industry is showing reluctance in restructuring projects as they expect to recover investments from real estate project financing (PF), resulting in less smooth disposal of non-performing assets than anticipated. In particular, with the base interest rate cut expected to revive real estate demand, savings banks appear to have entered a 'hold on' mode.

According to data requested by Assemblyman Shin Jang-sik of the Innovation Party from the Financial Supervisory Service on the 9th, the average winning bid price for 15 savings bank PF projects that were completed by the end of the third quarter this year was about 67% of the loan principal. This means that the savings banks that lent to these projects incurred losses of approximately 33% compared to their investment principal.

Regarding this, there is an analysis that the performance of savings banks in restructuring non-performing assets still falls short of the financial authorities' expectations. Due to the reluctance to accept confirmed losses by selling projects at low prices, savings banks are passive in disposing of bad assets. Although half of the six-month disposal deadline set by the financial authorities has passed, only about 20% of the PF projects subject to auction or public sale have been resolved.

Among the PF projects subject to auction or public sale worth about 2.1 trillion won, it has been confirmed that projects with procedures completed recently have exceeded 400 billion won. In the three months since the real estate PF restructuring process began in earnest last September, the savings bank industry's performance in disposing of non-performing assets has been only about 20%.

Lee Hyuk-jun, Head of Financial Evaluation at NICE Credit Rating, explained, "So far, projects with high feasibility have been disposed of within the range where no additional losses occur," adding, "There are still quite a few PF projects that savings banks need to dispose of, so difficult times will continue for the time being."

The vague expectation that the base interest rate cut will bring a favorable wind to the non-performing PF market is also a factor delaying the sale of non-performing loans. If the construction market recovers and projects are sold at around 100% of the loan principal, the allowance for loan losses accumulated in preparation for PF non-performance can be reversed. This reversal amount is calculated as income. Savings banks are known to have set aside allowances at about 30% of the loan principal.

A senior executive of a savings bank hinted, "If market conditions improve, would anyone want to sell projects that could be sold at 100% of the loan principal at prices lower than 60-70%?" He added, "This could lead to responsibilities such as breach of trust later on. The most worrisome situation is when there is a problem recovering the investment."

However, contrary to the savings banks' hopes, there is also an analysis that the effect of interest rate cuts on savings bank PF loans will be limited. This is because PF projects linked to savings banks have a high proportion of non-residential facilities in the metropolitan area and apartments in provincial areas. Since the real estate market is expected to recover mainly in metropolitan residential facilities after the interest rate cut, there are few savings bank projects that will benefit from the recovery in real estate demand.

Earlier, the financial authorities revised the detailed criteria for project feasibility evaluation in June, subdividing the previous lowest grade of 'deterioration concern' into 'Caution (C grade)' and 'Non-performing concern (D grade).' Projects rated as Caution are to pursue restructuring or voluntary sale, while those with Non-performing concern are to be sold through auction, public sale, or write-off. Disposal of non-performing projects began following the first project feasibility evaluation results released at the end of August.

A senior official from the financial authorities told Asia Economy in a phone interview, "To improve soundness indicators, a faster disposal of non-performing loans is necessary by the end of the year."