Capital Companies Struggled to Grow Core Business... Rising Concerns Over Real Estate PF Soundness

Financial Supervisory Service Chief: "Will Conduct Comprehensive Inspection of Real Estate PF and Risk Assessment by Project Site"

[Asia Economy Reporter Yu Je-hoon] As capital companies are shifting from their core retail market to the corporate and investment finance market, the real estate project financing (PF) sector is emerging as a potential risk factor threatening soundness.

According to NICE Credit Rating on the 10th, as of the end of the first quarter, the outstanding balance of real estate PF loans of 28 capital companies increased by about 51.8% year-on-year to approximately KRW 20.9 trillion. This level far exceeds the growth rate of household loans (6.1%). The average annual growth rate over the past five years (2017?2021) also reached 18%.

The reason capital companies have increased their handling of corporate and investment finance, especially real estate PF loans, is that their core installment and lease sectors have become red oceans due to the entry of card companies. As of the end of last year, the installment finance assets of seven domestic card companies (Shinhan, KB Kookmin, Samsung, Hyundai, Lotte, Woori, Hana) amounted to KRW 9.862 trillion, of which about 99% are automobile installment finance assets.

Of course, as of the end of the first quarter, the proportion of real estate PF in the 28 capital companies was not high at 12.6%. The problem is that since the real estate market is sensitive to interest rates and the economy, it entails both high profitability and risk.

In particular, recently, due to the interest rate hike trend, the real estate market is freezing to the extent that unsold units are occurring in provincial areas. An official from a specialized credit finance company said, "Above all, the problem is that the real estate market is tightening," adding, "If unsold (apartment) units surge in provincial areas, it is quite possible that small and medium-sized capital companies that supplied funds amounting to hundreds of billions of won will face difficulties in recovering funds."

The financial authorities are also actively managing risks, including announcing a full inspection. On the 5th, after a meeting with CEOs of specialized credit finance companies (card and capital), Lee Bok-hyun, Governor of the Financial Supervisory Service, told reporters, “It is true that the real estate proportion is high in the real estate corporate loans of the credit finance industry,” and added, “We will conduct a full inspection of real estate PF in the credit finance sector and check risks by business site.”

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