[Second-tier Finance Under Stress] ① Capital Companies' Non-performing Loans Increase by 530 Billion KRW in One Year... PF-related Dark Clouds Loom

Increase in Doubtful Recovery Grade Exceeds 200 Billion
Real Estate PF Bridge Loan Burden Remains
Risk May Grow Mainly for Credit Ratings Below A Grade

Non-performing loans (NPLs) of capital companies increased by more than 500 billion KRW in one year. This is attributed to problems arising from real estate project financing (PF) loans. Since many companies failed to repay or extended their bridge loans that matured at the end of last year, concerns are emerging that individual project risks could intensify starting from the first half of this year.

According to the Financial Supervisory Service's Financial Statistics Information System on the 26th, the balance of non-performing loans (overdue loans for more than 3 months) of 51 installment finance and leasing companies was 2.8009 trillion KRW last year. This represents an increase of 534.8 billion KRW (23.6%) compared to the previous year. The balance of the 'doubtful recovery' grade, which includes loans overdue between 3 and 12 months, also rose by 25.6% (208 billion KRW) to 1.0217 trillion KRW compared to the previous year. The number of companies with a non-performing loan ratio exceeding 1% increased from 25 last year to 28 this year.

All of the top five capital companies by asset size saw a sharp increase in non-performing loans. Hyundai Capital recorded 739.8 billion KRW, up 4.9% (34.6 billion KRW) from the previous year. Hana Capital increased by 65.9% (38.7 billion KRW), and KB Capital by 42.0% (87.2 billion KRW). Shinhan Capital's non-performing loans more than doubled from the previous year, rising 136.8% (43.1 billion KRW) to 74.6 billion KRW. Excluding Hyundai Capital, which mainly serves as the dedicated capital company for Hyundai Motor Group focusing on auto finance, all of the top five companies by asset size showed double-digit growth compared to the previous year.

The Shadow of Real Estate PF Loans Remains

The industry views the increased risk of real estate PF loan defaults as the primary cause. Professor Seo Ji-yong of the Department of Business Administration at Sangmyung University explained, "Capital companies tend to have relatively large PF loan portfolios, so they are not immune. Due to high funding costs and low credit ratings, they have aggressively entered real estate PF loans aiming for high returns."

According to the Bank of Korea, as of the end of last year, the balance of real estate PF loans in the secondary financial sector?including savings banks, capital companies, and insurance companies?was 85.8 trillion KRW. This accounts for 73.6% of the total financial sector balance of 116.5 trillion KRW. Among these, the capital industry alone is expected to reach around 25 trillion KRW.

Accordingly, the exposure to real estate PF-related risks in the secondary financial sector has also rapidly increased. Risk exposure is a conservative estimate of the maximum potential loss amount. It includes not only the PF loan balance but also the balances of all related transactions such as derivatives. As of September last year, the real estate PF risk exposure of credit-specialized financial companies, including capital and credit card companies, was 27.2 trillion KRW, up 38.1% from the previous year. Considering that the growth rate in other financial sectors was between 6% and 14%, this is an overwhelming pace.

Concerns of Polarization... Crisis May Hit in the First Half of This Year

There are forecasts that individual project risks may increase from the first half of this year as capital companies extended bridge loans maturing at the end of last year as ultra-short-term loans. Particularly, risks are expected to diverge according to credit ratings. Korea Ratings investigated 26 capital companies excluding those specializing in auto finance and pointed out that capital companies rated 'A' or below are the trigger for PF risks.

Of the 9 trillion KRW in bridge loans surveyed by Korea Ratings, about 88% mature this year. Among them, AA- rated companies such as Hyundai Capital, KB Capital, Shinhan Capital, Hana Capital, Woori Financial Capital, and Lotte Capital have a maturity ratio of 82% this year. In contrast, bridge loans of companies rated A or below, including Meritz Capital, Korea Investment Capital, Welcome Capital, OK Capital, DB Capital, and Kiwoom Capital, have a maturity ratio of 92% this year. The regional composition shows that only 35% are in Seoul. Even within subordinate and mezzanine assets, which have relatively lower repayment stability, regions outside Seoul account for 58-61%.

Oh Yuna, senior researcher at Korea Ratings' Financial and Structured Evaluation Division, said, "Assuming the real estate market downturn continues for 2 to 3 years, stress tests show that the potential risk asset ratio of capital companies rated A or below has risen sharply. For OK Capital, Korea Investment Capital, DB Capital, Kiwoom Capital, and Meritz Capital, whose bridge loan burden exceeds 0.5 times their equity capital, if large-scale bridge loan defaults materialize, liquidity management could become difficult and asset soundness could deteriorate rapidly," expressing concern.

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