Construction, Petrochemicals, and Metals Face Financial Risks

Warnings have emerged that financial instability in the construction, real estate, and retail sectors could spread to the financial industry. With the delinquency rate in the construction sector surpassing 5%, the debt repayment capacity of related industries is rapidly deteriorating, raising concerns about potential risks spreading to vulnerable non-bank financial institutions.

According to the Financial Stability Report released by the Bank of Korea on June 24, there were significant disparities in growth (revenue growth rate) and profitability (operating profit margin) across various sectors last year. While the transportation equipment and electronics sectors exceeded their average performance over the past decade in both growth and profitability, the construction, petrochemical, and metal product sectors fell significantly below their historical averages. The retail sector showed weak profitability, and the real estate sector experienced notable declines in growth.

The construction, petrochemical, and metal product sectors have faced ongoing challenges in growth and profitability over the past two to three years. The construction industry has been affected by a downturn in the real estate market and cost pressures due to high exchange rates, while the petrochemical and metal product sectors have seen performance declines amid oversupply from China and increasing domestic and international uncertainties.

This poor performance has led to a deterioration in debt repayment capacity. The interest coverage ratio for the construction sector plummeted from 8.1 in 2021 to just 1.0 last year. During the same period, the ratio for petrochemicals dropped from 14.1 to 1.3, and for metal products, it fell from 15.7 to 3.2. The retail and real estate sectors also exhibited low interest coverage ratios, indicating weakened repayment abilities.

The Bank of Korea highlighted the potential for the financial risks from these sectors to transfer to the financial industry. As of the first quarter of this year, loans to the three vulnerable sectors—construction, petrochemicals, and metal products—accounted for 11.6% of total corporate loans, with construction making up 4.6%, petrochemicals 2.9%, and metal products 4.1%.

Notably, the construction sector's delinquency rate has risen to 5.48% due to the realization of contingent liabilities stemming from defaults in real estate project financing (PF). In contrast, the delinquency rates for petrochemicals and metal products remain low at 0.65% and 0.80%, respectively, but the significant deterioration in their debt repayment capacity raises concerns that prolonged economic downturns or worsening domestic and international conditions could increase the risk of defaults.

Concerns are also significant for the retail and real estate sectors. The proportion of corporate loans in these sectors stands at 12.6% and 23.9%, respectively, totaling 36.5%. Their delinquency rates are above the overall average, with retail at 2.52% and real estate at 3.01%.

The Bank of Korea analyzed that the high loan proportions and delinquency rates in the construction, retail, and real estate sectors could have a relatively large impact on financial institutions. These sectors are particularly reliant on non-bank loans, raising the risk of rapid spread of financial instability among vulnerable non-bank financial institutions if defaults increase.

The Bank of Korea stated, "Sectors such as construction, petrochemicals, and metal products, which are experiencing performance declines due to structural factors, need to pursue consistent restructuring from a long-term perspective to improve their industrial health. Financial support should also be provided as necessary to alleviate liquidity burdens."

It added, "For sectors like retail and real estate, where financial institutions have significant exposure and high delinquency rates, managing the asset soundness of financial institutions is more critical than ever."