Disclosure of Real Estate PF Revaluation Results... FSS States "Limited Impact on Financial and Construction Companies" [Q&A]

Exposure of 21 Trillion KRW with Concerns of Negligence and Deficiency
9.7% of All Business Sites
Mutual Finance Largest Share at 9.9 Trillion KRW

On the 29th, the Financial Supervisory Service (FSS) disclosed the results of its reassessment of real estate project financing (PF) sites managed by financial companies. Of the total projects (216.5 trillion KRW), a primary evaluation was conducted on projects worth 33.7 trillion KRW (15.6%), resulting in a significant and potentially distressed exposure (risk exposure) amounting to 21 trillion KRW. This accounts for 9.7% of the total real estate PF projects.

By PF type, the amounts are 4.1 trillion KRW for main PF, 4 trillion KRW for bridge loans, and 12.9 trillion KRW for land-secured loans. By financial sector, the figures are 9.9 trillion KRW for mutual finance, 4.5 trillion KRW for savings banks, 3.2 trillion KRW for securities, 2.4 trillion KRW for specialized credit finance, 0.5 trillion KRW for insurance, and 0.4 trillion KRW for banks, in that order.

The FSS assessed that the impact of the significant and potentially distressed real estate PF on financial companies, construction firms, and project developers is expected to be limited. This is because the scale is generally within the predicted range, financial companies have sufficient financial capacity, and construction firms and developers do not have many risky projects.

The FSS held a briefing on the previous day regarding this primary evaluation, chaired by Park Sang-won, Deputy Director of the Small and Micro Finance Division. Below is a Q&A with Deputy Director Park Sang-won.

- The significant and potentially distressed exposure was estimated at 21 trillion KRW in this evaluation. Was this scale anticipated?

▲ When we initially announced the business feasibility evaluation criteria, we estimated it to be around 5-10%. It seems the results are within the expected range.

- The largest significant and potentially distressed exposure was in mutual finance (9.9 trillion KRW). Could you elaborate?

▲ The exposure was mainly from Saemaeul Geumgo. It is difficult to provide separate figures for Saemaeul Geumgo alone. Saemaeul Geumgo falls under the jurisdiction of the Ministry of the Interior and Safety.

- What is the impact on financial companies based on the business feasibility evaluation?

▲ Despite additional provisions required by this evaluation, capital ratios in most sectors have increased compared to the end of March through capital increases and other measures, so the overall impact appears limited. The fixed non-performing loan ratio, which rose significantly due to this evaluation, is expected to stabilize in the second half of the year if financial companies’ restructuring and resolution plans proceed smoothly.

- In May, the scale of 'potentially distressed' projects subject to light auction was estimated at 7 trillion KRW, but this evaluation shows 13.5 trillion KRW. Why the increase?

▲ Initially, the potentially distressed scale was estimated at 2-3%. It is now around 6%, influenced by a rapid rise in delinquency rates centered on land-secured loans in the first half of this year. It appears that existing delinquent defaults have worsened rather than new defaults emerging.

- If all potentially distressed projects are released for light auction, won’t the supply flood the market at once?

▲ Many potentially distressed projects are already undergoing light auctions, and the timing of auction releases is staggered according to loan maturity dates for each project. Therefore, auction supply is not expected to flood the market simultaneously. Main PF and guaranteed projects may be excluded from light auctions considering project circumstances.

- What is the impact of the business feasibility evaluation on construction firms and developers?

▲ For construction firms, most significant and potentially distressed loans are bridge loans and land-secured loans. The scale of main PF projects under construction is not large, so the impact on construction firms is limited. For developers, most participating in significant and potentially distressed projects are small-scale businesses, many of which were already distressed before this evaluation, so systemic risk concerns are minimal.

- How can developers and others check the results of the business feasibility evaluation?

▲ The evaluation results can be confirmed by inquiring with the main creditors. For projects subject to restructuring and light auction, the main creditors are expected to notify developers and construction firms accordingly.

- Is there a risk of chain defaults spreading from distressed projects and developers to otherwise normal projects?

▲ Most developers involved in significant and potentially distressed projects hold only a single project. Even if a developer provides reciprocal collateral rights across multiple projects, the possibility of chain defaults spreading from some distressed projects to normal projects is low. While collateral rights on normal project revenue rights may be exercised, the collateral amount is small relative to the total project scale, and most projects are expected to continue through creditor consultations.

- Was the business feasibility evaluation applied mechanically without reflecting individual project circumstances?

▲ Financial companies evaluated business feasibility comprehensively, considering not only the number of maturity extensions but also various factors such as guarantees, restructuring status, and project-specific characteristics.

- Could the business feasibility evaluation lead to a contraction in funding support for normal projects?

▲ The goal of the evaluation is to distinguish between good and bad projects, restructuring or resolving significant and potentially distressed projects while ensuring continuous funding support for normal projects. Financial companies plan to provide uninterrupted funding, including maturity extensions, for projects evaluated as normal (good or average) to ensure their smooth progress.

- What is the expected scale of additional significant and potentially distressed projects in the second evaluation scheduled for the end of September?

▲ The first evaluation, based on data as of the end of June this year, targeted projects with substantial delinquency, delinquency forbearance, or more than three maturity extensions. Projects with delinquency but deferred principal and interest payments were not classified as delinquent loans. Therefore, most significant and potentially distressed projects were reflected in this first evaluation, and few additional significant and potentially distressed projects are expected in the second evaluation in September. The exposure of significant and potentially distressed projects outside the first evaluation criteria is about 2.3 trillion KRW.

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