Authorities Conduct Intensive Review of PF Risks...Pressure on Bank Sector's 'Provisions' and Construction Firms' 'Contingent Liabilities'

Banks, Securities Firms, Savings Banks, Capital Companies, and All Financial Sectors
Financial Authorities Recently Hold Successive Industry Meetings
"Strict and Appropriate Responsibility for Risk Management Failures"
Focused Inspection on Construction Companies' Accounting Practices

Financial authorities are launching comprehensive controls to preemptively block uncertainties in the real estate project financing (PF) market triggered by the Taeyoung Construction workout crisis. The authorities have been holding consecutive meetings with commercial banks, securities firms, savings banks, and capital companies, urging them to actively build up provisions. Starting next month, they plan to conduct detailed inspections of the appropriateness of provisions through year-end audits based on last year's financial statements.

They will also focus on construction companies in the order-receiving industry to closely examine whether there is any distortion in revenue recognition based on construction progress rates, and verify whether amounts of real estate PF loan guarantees are properly recorded as contingent liabilities.

Financial Services Commission Chairman Kim Ju-hyun and Financial Supervisory Service Chairman Lee Bok-hyun are taking an oath at the Political Affairs Committee held at the National Assembly on the 29th. Photo by Kim Hyun-min kimhyun81@

According to financial authorities on the 30th, the Financial Services Commission and the Financial Supervisory Service have virtually concluded the early-year sector-specific meetings held across the entire financial sector, including commercial banks, securities firms, savings banks, and capital companies. From February, they plan to intensively inspect whether provisions related to real estate PF have been adequately reflected in the financial sector’s year-end reports.

A financial authority official explained, "Since the real estate PF issue is central at the beginning of the year, the issue of provisions across the financial sector will be a key monitoring point," adding, "The amount of provisions requested by the government may vary depending on the status of each PF project." The overall PF delinquency rate in the financial sector more than doubled from 1.19% at the end of 2022 to 2.42% at the end of September last year.

Major commercial banks must immediately reflect provisions due to the Taeyoung Construction workout. The estimated amount of provisions that KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank, and IBK Industrial Bank of Korea need to accumulate for Taeyoung Construction is about 295 billion KRW. Provisions must be built up for direct loans reclassified from 'normal' to 'substandard or below' as well as PF loans without guarantees.

In particular, since Financial Supervisory Service Governor Lee Bok-hyun recently emphasized at an internal executive meeting that "if PF loss recognition is avoided and funds are used for dividends or bonuses, strict accountability will be enforced," measures must be taken to accumulate provisions to the maximum extent possible within available capacity. Previously, the Financial Supervisory Service issued management cautionary measures to banks including KB Kookmin, Shinhan, Woori, NH Nonghyup, Gwangju, Daegu, and KakaoBank to strengthen their loan loss provision calculation systems.

Kim Ju-hyun, Chairman of the Financial Services Commission, Lee Bok-hyun, Governor of the Financial Supervisory Service, Seo Yoo-seok, Chairman of the Korea Financial Investment Association, Son Byung-doo, Chairman of the Korea Exchange, and other CEOs of the securities industry are attending the "Securities Industry CEO Meeting" held on the 24th at the Korea Financial Investment Association in Yeouido, Seoul, and posing for a photo. Photo by Kang Jin-hyung aymsdream@

More stringent demands are being made on the secondary financial sector, including securities firms and savings banks. As of the end of September last year, the PF loan balance in the securities industry was 6.3 trillion KRW. The delinquency rate was 13.85%, the highest among financial sectors. Although it decreased compared to June 2023, it rose sharply by more than 3 percentage points compared to the end of 2022. Meanwhile, the delinquency rate of savings banks increased from 2.05% at the end of 2022 to 5.56% at the end of September last year, and the delinquency rate of credit specialized companies such as capital firms rose from 2.2% to 4.44% during the same period.

The financial authorities held meetings with representatives of 10 securities firms, as well as officials from the Korea Exchange and the Korea Financial Investment Association, urging, "We hope that insolvent PF projects will be promptly and decisively resolved," and "Please sufficiently accumulate provisions at the time of settlement." They also emphasized, "If risk management failures by some companies cause financial market instability, strict and appropriate accountability will be enforced."

For savings banks and capital companies with large PF loan balances, they reportedly ordered that for bridge loans that are difficult to convert into main PF loans, expected losses must be fully recognized at settlement and provisions accumulated. They also pointed out that land-secured loans classified as general loans by savings banks require provision accumulation at the level of PF loans. A Financial Supervisory Service official explained, "We plan to carefully examine the appropriateness of provisions for each project," adding, "Face-to-face meetings will be conducted one-on-one if necessary."

Taeyoung Construction, which is experiencing a liquidity crisis due to real estate project financing (PF), has applied for a workout. On the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Jinhyung Kang aymsdream@

Not only the financial sector that lent money but also the accounting treatment of borrowing construction companies will be closely inspected. Given the characteristics of the order-receiving industry and ongoing difficulties due to high interest rates, high inflation, and rising raw material prices, there is concern about the recurrence of accounting violations aimed at making it appear that profits are generated in specific construction projects.

In particular, the Financial Supervisory Service plans to strictly manage and supervise issues such as the accounting cliff phenomenon caused by progress rate manipulation, omission of contingent liabilities and provisions, due to concerns about investor damage and market credibility deterioration.

Shin Gyu-jong, director at the Financial Supervisory Service, explained, "In the order-receiving industry, where long-term construction is carried out and estimated construction costs are calculated, profit and loss fluctuations due to changing circumstances are significant," adding, "Since estimates have a large impact on construction-related profit and loss, provisions, and contingent liabilities, there is a constant possibility of financial statement distortion, so companies and external auditors need to exercise special caution."

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