[PF Restructuring] ① "77% of Non-performing Sites to be Normalized by First Half of Next Year"... Detailed Measures for Recurrence Prevention Also Established

Financial Authorities Hold 'Real Estate PF Situation Review Meeting'
Detailed Plans to Improve Capital Adequacy Ratio and Completion Responsibility to be Prepared in H1 through TF
New PF Handling Amount Exceeds 15 Trillion Won for 2nd and 3rd Consecutive Quarters... "Positive Cycle Movement" Assessed
Business Feasibility Evaluation Completed for All PF Sites... C and D Grades Account for 10.9% of Total

The financial authorities plan to raise the self-capital ratio to the 20% range and reduce guarantees to prevent repeated insolvencies in the real estate project financing (PF) market. They will prepare and implement detailed measures to improve the PF business structure within the first half of the year. Additionally, improvement measures related to responsible completion will be prepared through consultations with the Ministry of Land, Infrastructure and Transport and other related ministries and agencies in the first quarter. A model code of conduct to curb the practice of financial companies demanding excessive fees under various names when providing PF loans will be established by January next year and applied to all financial sectors.

Furthermore, the financial authorities expect that out of the 20.9 trillion won worth of projects requiring liquidation and restructuring, projects worth 9.3 trillion won will complete the procedures by the end of this year, and projects worth 16.2 trillion won will complete them by the first half of next year. For projects with delayed procedures, the appropriateness of the delay reasons will be reviewed, and performance management will be further strengthened.

On the 19th, the Financial Services Commission held a 'Real Estate PF Situation Review Meeting' chaired by Secretary-General Kwon Daeyoung and announced plans to prepare detailed financial regulatory strengthening measures through a task force (TF) to prevent the recurrence of real estate PF crises by the first half of next year. The meeting was attended by related agencies such as the Financial Supervisory Service, Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, as well as representatives from the financial and construction industries. Each TF, established according to the institutional improvement plan announced on November 14, will differentiate risk weights and reserves based on the self-capital ratio invested in PF projects and revise risk weight and reserve regulations by financial sector. Limits on large credit exposures to real estate PF and real estate exposure limits by PF sector will also be newly established and revised.

The financial authorities are preparing stringent recurrence prevention measures because the soundness of the financial sector has been significantly shaken since 2022, when the profitability of real estate PF began to decline. According to the project viability evaluations conducted by the Financial Supervisory Service in August and October, 11% (22.9 trillion won) of the total PF exposure of 210.4 trillion won was classified as cautionary (C) or at risk of insolvency (D).

Secretary-General Kwon evaluated that "Considering the increase in new PF loan issuance and the expansion of private sector capital inflows, real estate PF risks are being managed stably," but added, "For the soundness management of financial companies and the virtuous cycle of funds in the PF market, the restructuring and liquidation of insolvent projects need to proceed smoothly as planned. Any additional necessary measures will be promptly addressed in consultation with related agencies."

Following the evaluations of real estate PF projects conducted in the first and second rounds up to September, the financial authorities strongly pressured for accelerated insolvency restructuring. As of October, projects that completed liquidation and restructuring procedures accounted for about 21% (4.5 trillion won) of the total target projects. Among these, projects related to residential facilities accounted for about half (2.8 trillion won, 122 projects), resulting in a housing supply effect of approximately 35,000 units, according to the financial authorities' analysis.

The financial authorities forecast that projects worth 9.3 trillion won, accounting for 44% of cautionary and at-risk projects, will complete procedures by the end of this year, and projects worth 16.2 trillion won, about 77% of the total, will complete procedures by the first half of next year. If all projects are liquidated and restructured as planned, an additional housing supply effect of 104,000 units is expected.

Secretary-General Kwon stated, "By October, projects worth 4.5 trillion won completed procedures, exceeding the initially planned 3.8 trillion won," adding, "While volumes related to auctions, private contracts, and write-offs exceeded plans, restructuring has progressed somewhat slowly. We plan to check the appropriateness of delay reasons for each project and strengthen management by requesting revised liquidation plans if necessary."

Additionally, the financial authorities judged that a virtuous cycle of funds is occurring in the PF market, as the new PF loan amount, which remained around 9 trillion won in the first quarter, exceeded 15 trillion won consecutively in the second and third quarters. The proportion of bridge loans, which had shrunk due to the contraction of the development market, is also on the rise. New PF loan amounts increased to 15.1 trillion won in the second quarter and 16.4 trillion won in the third quarter, and the bridge loan ratio rose from about 17% to 25% during the same period. Secretary-General Kwon said, "We expect that if bridge loans are normally converted to main PF loans in the future, the smooth landing of PF and the virtuous cycle of funds can be accelerated."

However, due to the application of stricter new standards by the financial authorities than the results of PF restructuring, exposure at risk of deterioration increased by more than 246% compared to 9.3 trillion won at the end of last year. As insolvent projects increased, the soundness and profitability of the financial sector also deteriorated. The fixed non-performing loan ratio of PF across the entire financial sector soared by 6.1 percentage points from 5.2% at the end of last year to 11.3% at the end of the third quarter this year. During the same period, reserve accumulation increased by 2.4 trillion won from 8.9 trillion won to 11.3 trillion won. Since reserves are treated as bad debt expenses, financial companies' profits decrease.

Accordingly, the financial authorities analyzed that most sectors saw an increase in capital ratios through capital increases compared to the end of last year, and there were no cases of failing to meet minimum regulatory ratios, so the impact on financial companies is not significant. Secretary-General Kwon explained, "The scale of ongoing main PF loans among cautionary and at-risk loans (4.6 trillion won) did not increase significantly compared to the evaluation at the end of June (4.11 trillion won). Participating developers are mostly small-scale companies with low sales, so the additional impact on construction companies and developers is limited."

Meanwhile, the financial authorities expect that the execution performance of syndicated loans and Korea Asset Management Corporation (KAMCO) funds, which provide necessary funds to projects lacking viability, will steadily increase. Since its launch, the PF syndicated loan for banks and insurance sectors (1 trillion won, up to 5 trillion won) has supported 3 projects with 359 billion won. The scale will be expanded to 2 trillion won in the first quarter of next year, when the initial 1 trillion won is expected to be exhausted, and will be gradually increased up to 5 trillion won in the future.

Saemaeul Geumgo and KAMCO formed a 500 billion won fund in September and will make the first investment in December. IBK and KAMCO will form a 250 billion won fund in December, and Woori Financial Group plans to form a 100 billion won fund early next year.