[Financial Sector Warning] Banks Fear Real Estate Loan Bombshell in Second Half

Five Major Banks' April Mortgage Loans Total 448 Trillion
Signs of Sharp Real Estate Market Decline
Collateral Value Drop Worsens Soundness
Overseas Real Estate Investment Funds Also at Risk

[Asia Economy Reporter Jo Gang-wook] Amid concerns over declining earnings and asset quality of commercial banks in the second half of the year due to the impact of the novel coronavirus disease (COVID-19), real estate and corporate loans are being identified as potential triggers for financial instability. If the real estate market downturn prolongs, not only will banks' credit creation capacity be significantly weakened, but also, as corporate loan demand rises amid ongoing liquidity tightening, banks' capital burdens could increase sharply.

According to the financial sector on the 8th, the outstanding balance of mortgage loans at the five major commercial banks?KB Kookmin, Shinhan, Woori, Hana, and NongHyup?stood at 448.7894 trillion won as of the end of April, up by 4.5905 trillion won from the end of the previous month. The increase in mortgage loans this year was 1.2557 trillion won in January and 956.4 billion won in February, but from March (4.6088 trillion won), when the COVID-19 situation intensified, the growth rate surged sharply.

The problem is that the real estate market is showing a rapid downturn. According to Real Estate 114, apartment prices in Seoul fell by 0.2% in April. In particular, the number of apartment sales transactions in Seoul and Gyeonggi areas sharply declined from 38,593 in February to 20,918 in March and 10,113 in April (as of May 5). For commercial real estate, transactions decreased from 3,299 in February to 2,697 in March and 1,464 in April. Due to the continued decline in transaction volume, there are concerns that borrowers struggling to repay principal and interest may lose opportunities for voluntary restructuring through asset sales, leading to an increase in loan delinquencies. The reason domestic banks have maintained the soundness of household and small business loans so far is that sufficient loan supply was made possible based on a favorable real estate market.

Seo Young-su, a researcher at Kiwoom Securities, said, "The variable that will determine domestic banks' profits in the future will be whether the real estate market downturn continues," adding, "In a banking system centered on real estate finance, if the real estate market slump prolongs, banks' credit creation capacity could be significantly weakened due to increased loan loss costs and a decline in collateral value."

Warning signs have also been raised regarding overseas real estate investments. The economic downturn caused by COVID-19 is now fully impacting the global real estate market. According to the International Finance Center, last year domestic institutional investors invested $17 billion (approximately 20.78 trillion won) in global commercial real estate (excluding the Asia-Pacific region), the largest amount among Asian countries. The balance of overseas real estate investment funds also reached about 50 trillion won.

Kim Sung-taek, a senior researcher at the International Finance Center, pointed out, "Since a general downturn in the global real estate market is expected, it is necessary to strengthen risk management of domestic institutions' overseas real estate investments," and added, "Attention should also be paid to the forecasted weakness in the domestic real estate market."

The continued liquidity tightening of marginal companies is also cited as a risk factor. Since April, export declines have intensified, significantly worsening conditions for export companies such as those in manufacturing. April exports fell by 24% compared to the same period last year. In particular, the decrease rate for automobile parts, which include many small and medium-sized enterprises, reached 49.6%. Meanwhile, the six-month principal and interest repayment deferral for individual business owners and small corporations is also expected to weaken banks' credit management capabilities, raising concerns that it will be a major factor in increased loan loss costs by the end of the year.

A representative of a commercial bank said, "The aftershocks of loans due to the COVID-19 situation will become fully apparent in the second half of the year," adding, "Although first-quarter earnings held up well, a wider decline in net interest margins is inevitable from the second half."

This content was produced with the assistance of AI translation services.