Savings Banks Waiting for Interest Rate Cuts, PF Burden Eased... "Concerns Over Recognition of Additional Insolvency"

As the U.S. Federal Reserve (Fed) implemented a 'big cut' by lowering the benchmark interest rate by 0.5 percentage points, attention is focused on whether the savings bank industry, which is at the center of real estate project financing (PF) defaults, can ease its burden.

In the market, there are expectations that if South Korea follows the U.S. in cutting interest rates, the real estate market will revive, bringing warmth to the frozen PF market. However, concerns remain that since the savings bank industry has not actively resolved bad projects until the first half of this year, additional loss recognition due to deteriorating soundness may continue for some time.

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On the 24th, financial authorities and the financial sector estimated the savings banks' real estate PF risk exposure at 16.6 trillion won as of the end of the first half of this year. By segment, the main PF exposure was 6.5 trillion won, bridge loans 1.3 trillion won, and land-secured loans 8.8 trillion won, with the exposure subject to caution or concern about default reaching 4.5 trillion won. If restructuring begins in earnest, centered on bridge loans and land-secured loans, the additional default scale could increase by up to 3.4 trillion won.

For now, the savings bank industry has collectively described the recent U.S. big cut as a "positive signal." They expect that if interest rates fall and the real estate market recovers, PF-related defaults will somewhat ease. A representative from the savings bank industry said, "Although there will be a time lag, we believe that interest rate cuts will raise sale and lease prices, improving the profitability of real estate PF projects," adding, "When disposing of PF projects through auctions or public sales, they can be sold under favorable conditions."

A financial authority official also said, "The overall atmosphere seems to be reviving recently, with the first syndicated loan in the savings bank sector scheduled," and forecasted, "If Korea lowers interest rates following U.S. monetary policy, PF assets evaluated as cautionary or at risk of default could be disposed of quickly."

Contrary to the hopes of the savings bank industry, some analyses suggest that the effect of interest rate cuts on real estate PF projects linked to savings banks will be limited. NICE Credit Rating recently diagnosed in its report titled 'How far has the savings bank real estate PF default cleanup progressed?' that the proportion of residential facilities in the metropolitan area, which could benefit from a recovery in real estate demand, is small within the total PF exposure of the savings bank industry.

In fact, among 14 savings banks rated by NICE Credit Rating (Koryo, Daol, Daeshin, DB, Accuon, SBI, Yegaram, OSB, Woori Financial, Yuanta, Kiwoom, Hana, Korea Investment, Hanwha), the proportion of metropolitan area residential facilities was only 29% as of the end of the first half of this year. The proportion of metropolitan non-residential facilities was the highest at 43.9%, while provincial residential and non-residential facilities accounted for 18.9% and 8.2%, respectively.

Since savings banks have been passive in resolving bad projects so far, there is also an analysis that if the cleanup of bad PF projects intensifies, the burden will increase regardless of the interest rate cut trend. The real estate PF exposure of the 14 savings banks amounts to 5.4 trillion won, but the scale of real estate PF disposed of by these banks in the first half of this year was only 319.3 billion won. The main PF and bridge loan amounts were 54 billion won and 265.3 billion won, respectively.

In particular, the cleanup of bad projects has been conducted within the range that does not generate additional losses. The total disposal profit from real estate PF cleanup in the first half of this year was 23.7 billion won, with 69% of the profit coming from auctions and public sales. By disposal type, the highest proportion was sales to the Korea Federation of Savings Banks fund at 64.7%, followed by auctions and public sales at 20.4%, and other sales types at 14.9%.

This is interpreted as a result of generating sales profits by cleaning up projects with high profitability first. A financial sector official explained, "From the seller's perspective, if there are projects that can be sold under good conditions in the market, they will choose auctions or public sales over funds," adding, "The best properties can be considered to be sold first through auctions or public sales."

Accordingly, NICE Credit Rating believes that the savings bank industry will inevitably have to recognize additional losses related to real estate PF. As projects with good profitability were cleaned up first during the first half of this year, the remaining projects are expected to have inferior profitability. Some projects classified as good or average may also experience deteriorating soundness due to poor sales rates or concentrated maturity structures. This leads to an increase in bad debt costs.

NICE Credit Rating estimated the total expected loss on real estate PF exposure for the entire savings bank industry at 2.6 trillion to 4.8 trillion won, and the amount of additional reserves to be set aside at approximately 1.1 trillion to 3.4 trillion won. Lee Jeong-hyun, senior researcher at NICE Credit Rating's Financial Evaluation Division, said, "There is a high possibility of interest rate cuts within the year, and the real estate market is recovering mainly in Seoul and the metropolitan area," but added, "The savings bank industry has a high proportion of metropolitan non-residential facilities and provincial apartments, and many projects are classified as bridge loans or cautionary/default risk grades, so the benefit will not be significant."

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