Banks and asset managers are expecting a wave of bad loans to hit South Korea in the coming months, as the country counts the cost of an ill-starred splurge on overseas office blocks and local infrastructure.
Fund managers in Seoul were among the biggest investors in European and U.S. commercial buildings in recent years, and the property crisis has left them with swaths of assets whose values have plunged, many due for refinancing. Others piled into domestic infrastructure projects, where defaults have already soared.
Some of the financial damage has been delayed because lenders to the project-finance funds — with backing from the Korean government — have been extending debt maturities and restructuring loans headed for trouble, according to half a dozen bankers and asset managers interviewed by Bloomberg. But with the property crisis deepening, the same people say the number of defaults is about to spiral as more real estate and loans become distressed.
While not systemic, it is the latest in a wave of financial troubles to hit Asia's fourth-largest economy, after a run on a credit union branch and a debt crunch triggered by Legoland Korea's default. The country holds assembly elections in April, and one of the government's priorities is trying to cauterize the wounds from the costly misadventures in overseas property and local project finance.
"They don't want a hard landing," says Soo Cheon Lee, co-founder of credit investor SC Lowy, who reckons the government will attempt to clean up the balance sheets of financial institutions after the vote. "They need to support the real estate industry and then they have to restructure."
The dangers are magnified by the large number of "nonbanks" such as securities firms, pension funds and credit cooperatives that put money into foreign property and project finance at home. Some of these entities have had a "significant increase" in non-performing loans, the International Monetary Fund wrote recently, referring to well overdue loans or ones unlikely to be repaid.
Scrutiny of the securities firms that manage the funds has been stepped up. After final losses from the property spree are tallied, Korea's Financial Supervisory Service watchdog will review whether any easing of investment rules prompted reckless behavior, according to a top FSS official. Asset managers spent tens of billions of dollars on overseas offices and risky real estate loans right before COVID and rate hikes upended the market.
"We are supervising the brokerages and asset management firms so that they do a thorough risk management process," the FSS wrote in an email to Bloomberg. "In the future, we may consider improving the systems if needed."
Referring to real estate projects, the watchdog said in a Dec. 14 statement that there were 120 sites available for auction and restructuring at the end of September after financial institutions found they lacked feasibility. That's up from 70 at the end of last year.
The government will support an orderly soft landing for project finance-backed real estate through tailored responses for each site, finance minister nominee Choi Sang-mok said earlier this week. Bank of Korea Governor Rhee Chang-yong said on Dec. 20 that achieving such an outcome is a key policy goal for the central bank.
Korean regulator, the Financial Services Commission, warned this month that individual firms may be at risk if overseas property bets go wrong, but said the probability of systemic stress is low.
"From next year, more NPLs (nonperforming loans) will surface" in real estate and project financing, says Min Joo Kang, senior economist at ING Bank NV in Seoul. "Savings banks and local banks will experience the hardest damage." Still, she agrees that a broader credit crunch is unlikely because of available tools such as the Bank of Korea providing liquidity to nonbank lenders.
