[The Editors' Verdict] PF Audit: Seeking a Soft Landing Over Political Strife

Poor Market Conditions Likely to Increase Non-Performing Assets
Collaboration Needed to Identify the Reality

With the national audit scheduled for next month, tension is rising across the financial sector, including financial authorities. The risk of insolvency in the financial sector due to construction project financing (PF) has become more serious than ever, increasing the likelihood of criticism from lawmakers.

Yoon Chang-hyun, a member of the People Power Party, ignited the issue by releasing data on 'PF balances and delinquency rates by financial sector' received from the Financial Supervisory Service. According to the data, as of the end of March this year, the PF loan balances of insurance companies and securities firms stood at KRW 42.2472 trillion and KRW 4.176 trillion, respectively. The delinquency rates rapidly increased to 0.31% and 4.71%, respectively. The PF loan balances and delinquency rates of card companies and savings banks also showed an upward trend. Along with delinquency rates, financial companies’ non-performing loans (NPLs) also began to accumulate.

The seriousness of the PF market is not fully reflected by loan and delinquency rates alone. For example, in the case of securities firms, the amount of debt guarantees related to PF far exceeds the actual loans disbursed. According to analysis data from Korea Ratings, the PF exposure of 21 domestic securities firms, including contingent liabilities such as debt guarantees, approaches KRW 25.3 trillion. This total PF exposure is six times larger than when considering loans alone.

The PF exposure with a high risk of default, such as bridge loans, amounts to about KRW 7 trillion. Bridge loans are funds borrowed by construction developers from financial companies to secure land, and if the sales are not successful, there is a high possibility of default. It is also problematic that more than half of securities firms’ bridge loans are subordinated and junior exposures, which are lower in repayment priority and thus carry higher risk. Furthermore, the average loan-to-value (LTV) ratio of bridge loans is 82%, while the recent land auction rate is only 77%. This indicates that a significant portion of the exposure in the subordinated and junior bridge loans has already entered the default zone.

Industry insiders estimate that these data are as of the end of March this year, and the current situation has likely worsened due to the rapid downturn in the real estate market. Since the real estate downturn is expected to last for an extended period, the amount of non-performing assets or assets at high risk of default is expected to continue increasing sequentially.

During the 2011 savings bank crisis, the real estate secured loans of the failed savings banks totaled KRW 14.7 trillion, with losses amounting to KRW 10.8 trillion. Risks arising from the real estate downturn, such as an increase in unsold houses after completion, a decline in land auction rates, and a slowdown in occupancy rates, materialized and led to a large-scale insolvency crisis. Considering the total PF exposure of financial companies and the speed of the real estate downturn now, the current risk appears to be much greater.

Given the heightened risk level, PF issues must be addressed in the national audit. However, this year’s PF-related audit is also likely to devolve into partisan conflict, which is concerning. The People Power Party is expected to hold the Moon Jae-in administration’s real estate policies responsible for the PF insolvency risk, while the Democratic Party is anticipated to question the PF management capabilities of Lee Bok-hyun, the Financial Supervisory Service chief and former prosecutor, launching an offensive. As in previous audits, the session could degenerate into a battleground over political issues such as the Seongnam Daejang-dong and Baekhyeon-dong PF cases.

Realistically, it is difficult to expect a national audit free from political strife. However, recognizing the urgent need for accurate assessment and solution-seeking to ensure a soft landing of the PF insolvency?the biggest financial sector risk?it is hoped that both ruling and opposition parties will come together and cooperate.

Lim Jeong-su, Head of Capital Markets Department

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