Illustration=ChatGPT Dall-E 3

The savings banks have reduced their real estate project financing (PF) exposure ratio by more than 40 percentage points in the first quarter of this year. According to current law, the implementing company must contribute at least 20% of the funding for PF projects from its own capital, but the financial authorities have temporarily suspended this regulation since last year.

When the regulation is suspended, the participation of implementing companies in PF auctions increases as they no longer have the burden of capital expansion, allowing savings banks to quickly offload bad debts. As the suspension period is set to expire at the end of this year, savings banks are focusing all their efforts on cleaning up bad PFs.

According to a report from NICE Investors Service on the 4th, the PF ratio compared to the equity of the savings banks (14 companies with credit ratings) for the first quarter of this year was recorded at 72%. The PF ratio for savings banks in 2023 was 114.7%, meaning they have reduced it by 42 percentage points in just one year and three months.

Real estate PF is an investment method that borrows development funds against the collateral of sales revenue. The domestic real estate PF market grew rapidly between 2020 and 2022, significantly influenced by increased supply during the recovery from COVID-19. However, later, it faced issues, including rising interest rates, high inflation, increased unsold properties, rising costs, and declining sales rates due to worsening domestic and international conditions. As a result, the profitability of implementing companies has drastically reduced since the second half of 2022 as they failed to repay the principal and interest on loans properly.

Since May of last year, the financial authorities have suspended the obligation for implementing companies to maintain capital when borrowing funds for the auction and public sale purchases of savings bank PFs. This is to encourage the cleanup of bad PFs in savings banks. According to regulations, savings banks can only provide real estate PF loans for projects where the implementing company contributes more than 20% of the real estate development project fund from its own capital. This is to prevent companies with little to no equity from easily going bankrupt when projects fail and offloading their debts onto savings banks.

/News1

However, if a savings bank disposes of a troubled business site through auction and a new implementing company comes in to restructure the project, it does not need to adhere to the '20% rule'. The Financial Supervisory Service's plan is for new implementing companies to actively purchase troubled development projects that come up for auction and reorganize them, ultimately cleaning up the overall real estate market's issues in the long term. The FSS has announced that it will extend the suspension period until the end of this year.

From the perspective of savings banks, this is a situation where they must concentrate all their efforts on cleaning up bad PFs within the regulatory suspension period this year. The Korea Savings Bank Association cleaned up 540 billion won worth of bad PF debts last year. This year, they have already cleaned up 1.4 trillion won worth of bad PF debts in the first half alone. Through this, they have mostly resolved around 2 trillion won worth of bonds assessed as 'bad risk' by the Financial Services Commission in the past two years. Industry perspectives suggest that the total amount, including bonds resolved by individual savings banks rather than the Korea Savings Bank Association, is likely to be even greater.

Savings banks are in a situation where they must quickly recover their revenue while cleaning up bad PFs. The 79 savings banks nationwide suffered nearly 400 billion won in losses due to the expansion of bad PF loans last year. This marks the second consecutive year of significant losses, following a loss of 575.8 billion won in 2023. A savings bank official noted, "The savings banks have become the sector most scrutinized by financial authorities regarding PF-related issues, which is why we are fully committed to resolving related bad debts," adding, "As the extension of the regulatory suspension period is uncertain, we must resolve as many bonds as possible within this year."

※ This article has been translated by AI. Share your feedback here.