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Financial authorities urge securities firms to manage project financing risk exposure
By Anna J.Park
Warning signs of growing instability in the local real estate project financing industry are appearing, with the industry’s total loan balance surpassing 131 trillion won ($103.5 billion) and a delinquency rate exceeding 2 percent.
According to the latest data submitted by the Financial Supervisory Service (FSS) to Rep.Yun Chang-hyun of the ruling People Power Party, the total balance of real estate project financing loans in the financial sector stood at 131.6 trillion won, as of the end of March.This is up by 1.3 trillion won in just three months from 130.3 trillion won at the end of last year.
The loan balance of real estate project financing in Korea stayed around 92.5 trillion won by the end of 2020, yet it has been surging since 2021.By the end of 2021, the total loan balance increased to 112.9 trillion won, a 22 percent hike in just a year.
The real threat is the rising delinquency rate.Due to the real estate market slowdown and asset price plunges last year, a number of real estate project financing businesses have faced crises in maintaining profitability and fund retrieval, resulting in a delinquency rate of 2.01 percent as of the end of March.This is a rise of 0.82 percentage points from 1.19 percent at the end of December last year.
Given that the delinquency rate of local real estate project financing businesses was only at 0.55 percent at the end of 2020 and 0.37 percent in 2021, the current rising trend is troubling the market’s stability.Market insiders point out that the combination of the overall loan balance increase and the delinquency rate surpassing 2 percent indicates the possibility of serious threats to the market.
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The largest increase in the real estate project financing loan balance was seen in banks between the end of last year and the end of March, during which it increased by 2.2 trillion won.
Securities firms also saw their loan balance increase by 800 billion won during the period.Insurance firms and savings banks, in contrast, both saw decreases of 400 billion won each.
Securities firms in particular pose the greatest risks among the sectors, in terms of the delinquency rate for real estate project financing.The delinquency rate of local securities firms stood at a whopping 15.88 percent as of March, jumping more than 10 percentage points from the 3.37 percent marked in 2020 and 3.71 percent in 2021.When compared to 10.38 percent, the delinquency rate logged at the end of December last year, it rose by 5.5 percentage points.
While the delinquency rates of savings banks and capital firms stand at slightly above 4 percent each, the delinquency rates of real estate project financing loan from banks stood at zero, and those from insurance firms and mutual finance institutions were also at stable levels of 0.66 percent and 0.1 percent, respectively.
Participants attend a meeting hosted by the Financial Supervisory Service (FSS) on real estate project financing exposure and risk management in Seoul, Thursday.Executives of 10 local securities firms responsible for investment and risk management attended the meeting.Courtesy of FSS
With risks from the real estate project financing sector looming large on financial stability, financial authorities have been taking various measures to calm the market.Thursday’s meeting hosted by the Financial Supervisory Service (FSS) was one such actions.Executives of 10 local securities firms responsible for investment and risk management attended the meeting to discuss ways to manage the remaining loan balance for real estate project financing as well as overseas alternative investment.
“Preemptive measures should be taken to strengthen investor protection, including confirming the effectiveness of various safety mechanisms such as collateral, guarantees and insurance that increase the possibility of recovering investors’ capital in case of defaults,” FSS Deputy Governor Hwang Seon-oh said during the meeting.
The FSS also called on securities firms to resolve market dangers posed by loans of deteriorating profitability swiftly through restructuring or external sales.
It requested cooperation to ensure the smooth conversion of short-term project financing debt into long-term loans.
“The FSS also emphasizes the need to sufficiently secure the preparatory ability to absorb potential losses from a prolonged real estate market downturn.With regard to bridge loans with uncertain business outlook due to loan maturity extensions or permit delays, it is significant to set aside enough loan-loss reserves,” Hwang said.
The FSS will continue to actively monitor and respond to risk factors preemptively, vowing to closely examine the potential impacts of weakened real estate exposures on securities firms’ liquidity risks.Securities firms with vulnerable risk management will be required to submit plans for strengthening their risk factors, along with separate interviews with their CEO.
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