Securities Firms' PF Debt Guarantees Surge by 1 Trillion Won in 3 Months... Balance Nears 23 Trillion Won

Delinquency Rate 17.3% · Default Rate 21.8%
Rep. Yoon Chang-hyun "Possibility of Default Domino Effect"

The outstanding balance of real estate project financing (PF) debt guarantees managed by securities firms approached 23 trillion won as of the end of June. This represents a sharp increase of 1.04 trillion won in just three months. Debt guarantees mean that if the developer fails to repay the PF loan, the securities firm pays the money on their behalf. There are growing concerns about the possibility of a domino effect of defaults, as about 20% of securities firms' PF loans are considered irrecoverable.

According to data received by Rep. Yoon Chang-hyun of the People Power Party from the Financial Supervisory Service on the 22nd, the scale of securities firms' real estate PF debt guarantees in the second quarter was 22.9 trillion won, approximately four times the PF loan balance (5.5 trillion won). The total real estate PF exposure of securities firms, combining debt guarantees and loan balances, was 28.4 trillion won, an increase of 1.3 trillion won in three months. The delinquent balance is also rising. The PF delinquent balance, which was 840.4 billion won at the end of the first quarter, increased to 949.2 billion won at the end of the second quarter. The delinquency rate rose from 15.9% to 17.3% during the same period. The ratio of non-performing loans classified as fixed, doubtful recovery, and estimated loss loans?referred to as fixed-below-standard loans?increased from 19.8% at the end of the first quarter to 21.8% at the end of June. Compared to trends of 5.5% at the end of 2020 → 5.7% at the end of 2021 → 14.8% at the end of 2022 → 19.8% at the end of March 2023, this represents a very rapid increase.

Securities firms typically support PF funds in the form of debt guarantees rather than direct loans. If real estate sales are sluggish or the project is delayed or canceled, and the developer fails to repay the PF loan, the guaranteeing securities firm must repay the money on their behalf.

There are also concerns that the steadily rising PF delinquency rates and loan interest rates could make the massive debt guarantee balance a potential trigger for securities firms' insolvency. The interest rate on securities firms' PF loans rose from 4.8% per annum at the end of 2020 to 6.9% at the end of last year, and 7.1% at the end of June this year.

The total real estate PF exposure of all financial companies, including securities firms' debt guarantees, reached 156 trillion won as of the end of June. This is an increase of about 2.5 trillion won compared to 153.52 trillion won in the first quarter of this year. By industry sector, except for capital companies, delinquency rates on real estate PF loans increased across all sectors. The banking sector's delinquency rate, which was 0% at the end of the first quarter, rose to 0.23% at the end of the second quarter. Savings banks increased from 4.1% to 4.6%, securities firms from 15.9% to 17.28%, and mutual finance from 0.10% to 1.12%.

Rep. Yoon said, "The overall soundness of real estate PF across the financial industry is at a manageable level, but proactive measures must be prepared to prevent the high delinquency rate of securities firms from leading to a 'default domino effect.'"

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