Despite significant reductions in project financing (PF) exposure due to restructuring, concerns over asset quality are rising, particularly among mutual finance institutions and savings banks. The financial sector continues to face challenges in maintaining stability as the real estate market recovery lags, compounded by rising market interest rates and construction costs.
As of the end of the first quarter of this year, the non-performing asset ratio for mutual finance institutions reached 29.8%, up 4.5 percentage points from 25.3% at the end of last year, marking the highest level among financial sectors. Savings banks followed with a 1.5 percentage point increase to 14.9% during the same period.
The non-performing asset ratio indicates the proportion of PF assets held by financial institutions that are deemed to have low viability or are at risk of default. An increase in this ratio suggests a growing likelihood of future losses.
Although savings banks have significantly reduced their PF exposure, the quality of their assets has deteriorated. Their PF exposure surged to 150% of equity at the end of 2023 but was reduced to 56% by the end of March this year following major restructuring. However, the non-performing asset ratio rose from 13.4% at the end of last year to 14.9%. Mutual finance institutions reported a PF exposure of 39% relative to their equity, with a notable increase of 700 billion won in non-performing assets compared to the previous quarter, the largest increase in the financial sector.
While banks and insurance companies are also seeing increases in non-performing PF assets, the burden is particularly pronounced for savings banks and mutual finance institutions due to their higher exposure relative to equity. If additional defaults occur, the pressure to increase loan loss provisions could significantly impact capital ratios and profitability.
Market analysts express concerns that normalizing PF projects may become increasingly difficult. Rising market interest rates lead to higher financial costs for projects, and when combined with escalating construction costs, the overall financial burden increases. If sales do not meet expectations or if project sales are delayed, the recovery of loans may also be postponed, potentially prolonging the need for loan extensions or restructuring.
For financial institutions, delays in project resolution mean they must hold related exposures for extended periods. If projects classified as non-performing deteriorate further, the need for increased loan loss provisions could arise. As of the end of March this year, the loan loss provisions for the savings bank sector had risen to 5.7832 trillion won, reversing a previous downward trend since the end of last year.
Increased provision burdens directly affect the profitability of financial institutions. The Saemaul Geumgo reported a net loss of 1.2658 trillion won last year due to the sale of delinquent loans and expanded provisions. Experts warn that if PF defaults materialize further, both the burden of provisions and profitability pressures in the second financial sector could intensify.
A financial sector official stated, "While PF exposure has decreased, it does not mean that risks have been eliminated. Particularly for savings banks and mutual finance institutions, the burden relative to equity remains significant, and the high proportion of non-performing projects necessitates a careful assessment of the quality of remaining projects and provision burdens. Furthermore, if the recovery of the real estate market and project resolutions are delayed, it could take considerable time to improve stability indicators."
* This article has been translated by AI.
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